Getting the valuation formulas right when it comes to annuities

Becker, Denis

doi:10.1108/mf-03-2021-0135

Cited by 7 publications

(6 citation statements)

References 41 publications

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“…The BFO theory is well-known in the literature (for example, see references (Dimitropoulos 2014; Luiz and Cruz 2015;Barbi 2011;Pavel 2018;Franc-D ąbrowska et al 2021;Angotti et al 2018;Vergara-Novoa et al 2018;Mundi et al 2021;Sadiq et al 2021;Becker 2022;El-Chaarani et al 2022;Huang et al 2020;Islam and Khandaker 2015;Singhal et al 2022)) and is widely used in practical calculations (see, for example, (Vergara-Novoa et al 2018;Mundi et al 2021;Sadiq et al 2021;Singhal et al 2022;Brusov et al 2023)).…”

Section: A Literature Reviewmentioning

confidence: 99%

Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit

Brusov

Filatova

Kulik

2023

JRFM

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Two modifications of a modern theory of capital structure—the Brusov–Filatova–Orekhova (BFO) theory—with variable income are considered: (1) with the income tax payments at the end of periods and (2) with advance income tax payments. BFO formulas for the WACC, and for company capitalization, V, were derived for these two cases. Using the obtained formulas, the dependence of the weighted average cost of capital, WACC; the discount rate; WACC–g (here, g, is the growth rate); company value, V; and the equity cost, ke, on the leverage level, L, at different values of g, at different values of the debt capital cost, kd, and at different values of company age, n, were studied. Comparing the results for cases (1) and (2) shows that case (2) is always preferable for both the company and the regulator. Recommendations have been developed for both parties to expand the practice of advance income tax payments. The managerial implications are as follows. Companies may choose to pay income tax either in advance or at the end of the reporting period in accordance with current results and tax laws. The developed methodology makes it possible to study companies with growing profits and companies with falling profits, which is very important in practice. It also allows the study of companies for which profits could rise and fall in different periods.

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Section: A Literature Reviewmentioning

confidence: 99%

Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit

Brusov

Filatova

Kulik

2023

JRFM

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“…In the literature, the methodology and results of the Brusov-Filatova-Orekhova (BFO) theory are well known (for example, see references [16][17][18][19][20][21][22][23][24][25][26][27]). A number of papers (see, for example, [22][23][24]) have used the BFO theory in practical calculations.…”

Section: A Literature Review On the Development Of The Capital Cost A...mentioning

confidence: 99%

“…The authors of [25] considered the adjusted present value method, the free cash flow (FCF) method, the flow-to-equity method and the relationships between these methods. The authors departed from Modigliani and Miller method and used a stationary FCF method and the Miles and Ezzell method to consider FCF as a first-order autoregressive possession.…”

Section: A Literature Review On the Development Of The Capital Cost A...mentioning

confidence: 99%

“…In Section 3, we present our investigation into the impact of the frequency of profit tax payments on the dependence of the WACC, capital value and equity cost on the leverage level of companies of different ages (3 or 6 years) using Microsoft Excel. For the WACC, we used Formula (10) and for capital value and equity cost, we used Formulas ( 24) and (25), respectively (see below).…”

Section: Formulae For the Capital Value And Equity Costmentioning

confidence: 99%

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Influence of Method and Frequency of Profit Tax Payments on Company Financial Indicators

Brusov

Filatova

2022

Mathematics

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In practice, profit tax payments are (1) made more frequently than annually and (2) can be made in advance. To study the influence of these two factors on the financial indicators of a company, we generalized the Brusov–Filatova–Orekhova (BFO) theory for the case of advance profit tax payments with an arbitrary frequency for the first time. Using modified BFO formulae, we showed that all financial indicators of a company, such as company value, the weighted average cost of capital (WACC) and equity cost (ke), depend on the frequency of the profit tax payments. We found that the WACC increased with the payments and the company value decreased with the payments. This meant that more infrequent payments could be beneficial for the company. The tilt angle of the equity cost (ke(L)) also increased with the payments. Depending on the age of the company, the equity cost either decreased with L for all payment frequencies or increased for some frequencies. We compared the obtained results to those that we described recently for profit tax payments at the end of the financial period and found them to be totally different. We found that in spite the fact that the WACC decreased with the payments and the company value increased with the payments, the WACC value in this case turned out to be bigger and the company value turned out to be smaller than in the case of advance profit tax payments of any frequency. This underlined the importance of advance profit tax payments. Regulator recommendations were also developed to encourage the practice of advance profit tax payments due to the understanding of the benefits of this for both parties: the companies and the state. A new effect was discovered: the decrease in equity cost with an increase in the level of leverage (L).

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“…This generalization takes into account the real conditions of the work of the companies. The Brusov-Filatova-Orekhova (BFO) theory, its methodology, and results are widely known (see, for example, [14,[19][20][21][22][23][24][25][26]). A lot of authors of [21][22][23] use the BFO theory in practice.…”

Section: Introductionmentioning

confidence: 99%

Peculiar properties of the financial state of companies with falling income

Brusov,

Filatova,

Kashirin

et al. 2023

jour

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The recent rise in inflation in Europe, caused by the pandemic, the increase in prices for energy resources and the violation of the logistics of energy supplies, has led to a decrease in company income. This makes it relevant to study the financial condition of companies with falling revenues. The purpose of this study is the development of tools for quantifying the impact of falling company incomes is becoming essential for making adequate management decisions. Until recently, such tools in capital structure theory did not exist. Two main theories of the capital cost and capital structure — Brusov — Filatova — Orekhova (BFO) theory and Modigliani — Miller (MM) theory — described companies with constant revenue: the first — for arbitrary age company, the second — for perpetuity companies. Within last couple years both these theories have been generalized for the case of variable revenue. In this paper the peculiar properties of the financial state of companies with falling income are studied within the modern capital cost and capital structure theory — Brusov–Filatova– Orekhova (BFO) theory, generalized for the case of variable revenue. As part of the goal, the tasks are solved to study the behavior of the main financial indicators (the cost of raising capital, the discount rate, the company’s capitalization, the cost of equity, and others), their dependence on debt financing, the age of the company in the face of declining income, which will make it possible to make adequate management decisions and reduce risks for companies.

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Getting the valuation formulas right when it comes to annuities

Cited by 7 publications

References 41 publications

Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit

Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit

Influence of Method and Frequency of Profit Tax Payments on Company Financial Indicators

Peculiar properties of the financial state of companies with falling income

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