# New Mechanism of Formation of the Company’s Optimal Capital Structure, Different from Suggested by Trade-Off Theory

Chapter

First Online:

## Abstract

Under condition proved by us, insolvency of the well-known classical trade-off theory and question of finding new mechanisms of formation of the company’s optimal capital structure, different from the one suggested by trade-off theory, become very important. One of the real such mechanisms is developed by us in this chapter. It is based on the decrease of debt cost with leverage, which is determined by growth of debt volume. This mechanism is absent in perpetuity Modigliani–Miller theory, even in modified version, developed by us, and exists within more general modern theory of capital cost and capital structure by Brusov*–*Filatova*–*Orekhova (BFO theory).

## References

- Brennan M, Schwartz E (1978) Corporate income taxes, valuation, and the problem of optimal capital structure. J Bus 51:103–114CrossRefGoogle Scholar
- Brennan M, Schwartz E (1984) Optimal financial policy and firm valuation. J Financ 39:593–607CrossRefGoogle Scholar
- Brusov PN, Filatova ТV (2011) From Modigliani–Miller to general theory of capital cost and capital structure of the company. Finance and Credit 435:2–8Google Scholar
- Brusov P, Filatova T, Orehova N, Brusova A (2011a) Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company. Appl Financ Econ 21(11):815–824CrossRefGoogle Scholar
- Brusov P, Filatova T, Orehova N, Brusov PP, Brusova N (2011b) From Modigliani–Miller to general theory of capital cost and capital structure of the company. Res J Econ Bus ICT 2:16–21Google Scholar
- Brusov P, Filatova T, Orehova N et al (2011c) Influence of debt financing on the effectiveness of the investment project within the Modigliani–Miller theory. Res J Econ Bus ICT (UK) 2:11–15Google Scholar
- Brusov P, Filatova T, Eskindarov M, Orehova N (2012a) Influence of debt financing on the effectiveness of the finite duration investment project. Appl Financ Econ 22(13):1043–1052CrossRefGoogle Scholar
- Brusov P, Filatova T, Eskindarov M, Orehova N (2012b) Hidden global causes of the global financial crisis. J Rev Global Econ 1:106–111Google Scholar
- Brusov P, Filatova P, Orekhova N (2013a) Absence of an optimal capital structure in the famous tradeoff theory! J Rev Global Econ 2:94–116Google Scholar
- Brusov P, Filatova T, Orehova N (2013b) A qualitatively new effect in corporative finance: abnormal dependence of cost of equity of company on leverage. J Rev Global Econ 2:183–193Google Scholar
- Brusov P, Filatova P, Orekhova N (2014a) Mechanism of formation of the company optimal capital structure, different from suggested by trade off theory. Cogent Econ Finance 2:1–13. https://doi.org/10.1080/23322039.2014.946150 CrossRefGoogle Scholar
- Brusov P, Filatova T, Orehova N (2014b) Inflation in Brusov–Filatova–Orekhova theory and in its perpetuity limit—Modigliani–Miller theory. J Rev Global Econ 3:175–185CrossRefGoogle Scholar
- Brusov P, Filatova T, Orehova N, Eskindarov M (2015) Modern corporate finance, investment and taxation, 1st edn. Springer, Berlin, pp 1–368CrossRefGoogle Scholar
- Brusov P, Filatova T, Orehova N, Kulk V, Weil I (2018a) New meaningful effects in modern capital structure theory. J Rev Global Econ 7:104–122CrossRefGoogle Scholar
- Brusov P, Filatova T, Orehova N, Kulk V (2018b) A “golden age” of the companies: conditions of its existence. J Rev Global Econ 7:88–103CrossRefGoogle Scholar
- Brusov P, Filatova T, Orehova N, Kulk V (2018c) Rating methodology: new look and new horizons. J Rev Global Econ 7:63–87CrossRefGoogle Scholar
- Brusov P, Filatova T, Orehova N, Kulk V (2018d) Rating: new approach. J Rev Global Econ 7:37–62CrossRefGoogle Scholar
- Brusova A (2011) А comparison of the three methods of estimation of weighted average cost of capital and equity cost of company. Financ Anal Prob Sol 34(76):36–42Google Scholar
- Filatova Т, Orehova N, Brusova А (2008) Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company. Bull FU 48:68–77Google Scholar
- Leland H (1994) Corporate debt value, bond covenants, and optimal capital structure. J Financ 49(4):1213–1252CrossRefGoogle Scholar
- Myers S (2001) Capital structure. J Econ Perspect 15:81–102CrossRefGoogle Scholar
- Мodigliani F, Мiller M (1958) The cost of capital, corporate finance, and the theory of investment. Am Econ Rev 48:261–297Google Scholar
- Мodigliani F, Мiller M (1963) Corporate income taxes and the cost of capital: a correction. Am Econ Rev 53:147–175Google Scholar
- Modigliani F, Miller M (1966) Some estimates of the cost of capital to the electric utility industry 1954–1957. Am Econ Rev 56:333–391Google Scholar

## Copyright information

© Springer Nature Switzerland AG 2018