Digest Finance

Incorporation of Rating Parameters into the Perpetuity Limit of the BrusovFilatovaOrekhova Modern Theory of Capital Structure

Vol. 22, Iss. 4, DECEMBER 2017

PDF  Article PDF Version

Received: 4 August 2017

Received in revised form: 28 August 2017

Accepted: 21 September 2017

Available online: 19 December 2017


JEL Classification: G24, G32

Pages: 468482


Brusov P.N. Financial University under Government of Russian Federation, Moscow, Russian Federation

Filatova T.V. Financial University under Government of Russian Federation, Moscow, Russian Federation

Orekhova N.P. Southern Federal University, Rostov-on-Don, Russian Federation

Kulik V.L. Financial University under Government of Russian Federation, Moscow, Russian Federation

Importance The research focuses on the existing systems of rating, respective methodologies and weaknesses of these methods.
Objectives We modify the methodology embedded into the existing rating systems and devise a brand new approach based on the appropriate application of discounting to cash flows, use of rating ratios while discounting, correct assessment of discount rates in line with financial ratios.
Methods The research deals with the perpetuity limit of the BrusovFilatovaOrekhova modern theory of capital cost and capital structure. We also rely upon the modified theory for rating purposes and ratios.
Results We modify the methodology of the existing rating systems and devise an absolutely new approach to it.
Conclusions and Relevance Modifying the rating methodology, we make our own assessments more accurate and unbiased. Using the toolkit of the developed theories, we reach new horizons of the rating practice since it enables the rating segment to predominantly use quantitative methods. The proposed approach should be applied by all rating agencies in assessing the creditworthiness of issuers.

Keywords: rating, rating methodology, BrusovFilatovaOrekhova theory, BFO theory, coverage ratio, leverage ratio


  1. Brusov P.N., Filatova T.V., Orehova N.P., Eskindarov M.A. Modern Corporate Finance, Investment and Taxation. Springer International Publishing, 2015, 368 p.
  2. Brusova A.P. [Comparison of the methods for assessment of weighted average cost of capital and the value of its equity]. Finansovaya analitika: problemy i resheniya = Financial Analytics: Problems and Solutions, 2011, no. 34, pp. 3642. URL: Link (In Russ.)
  3. Myers S.C. Capital Structure. Journal of Economic Perspectives, 2001, vol. 15, iss. 2, pp. 81102. URL: Link
  4. Modigliani F., Miller M.H. The Cost of Capital, Corporate Finance and the Theory of Investment. The American Economic Review, 1958, vol. 48, no. 3, pp. 261297.
  5. Modigliani F., Miller M.H. Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 1963, vol. 53, no. 3, pp. 433443.
  6. Modigliani F., Miller M.H. Some Estimates of the Cost of Capital to the Electric Utility Industry 19541957. The American Economic Review, 1966, vol. 56, no. 3, pp. 333391.
  7. Baker M., Wurgler J. Market Timing and Capital Structure. The Journal of Finance, 2002, vol. 57, iss. 1, pp. 132. URL: Link
  8. Beattie V., Goodacre A., Thomson S.J. Corporate Financing Decisions: UK Survey Evidence. Journal of Business Finance & Accounting, 2006, vol. 33, iss. 9-10, pp. 14021434. URL: Link
  9. Bikhchandani S., Hirshleifer D., Welch I. Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades. The Journal of Economic Perspectives, 1998, vol. 12, no. 3, pp. 151170. URL: Link
  10. Brennan M., Schwartz E.S. Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure. The Journal of Business, 1978, vol. 51, iss. 1, pp. 103114.
  11. Brennan M.J., Schwartz E.S. Optimal Financial Policy and Firm Valuation. The Journal of Finance, 1984, vol. 39, iss. 3, pp. 593607. URL: Link
  12. Dittmar A., Thakor A. Why Do Firms Issue Equity? The Journal of Finance, 2007, vol. 62, iss. 1, pp. 154. URL: Link
  13. Drobetz W., Pensa P., Wanzenried G. Firm Characteristics and Dynamic Capital Structure Adjustment. URL: Link
  14. Fama E.F., French K.F. Financing Decisions: Who Issues Stock? Journal of Financial Economics, 2005, vol. 76, iss. 3, pp. 549582. URL: Link
  15. Fischer E., Heinkel R., Zechner J. Dynamic Capital Structure Choice: Theory and Tests. The Journal of Finance, 1989, vol. 44, iss. 1, pp. 1940. URL: Link
  16. Graham J.R., Harvey C.R. The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 2001, vol. 60, iss. 2-3, pp. 187243. URL: Link00044-7
  17. Hamada R. Portfolio Analysis, Market Equilibrium, and Corporate Finance. The Journal of Finance, 1969, vol. 24, iss. 1, pp. 1331. URL: Link
  18. Harris M., Raviv A. The Theory of Capital Structure. The Journal of Finance, 1991, vol. 46, iss. 1, pp. 297355. URL: Link
  19. Hovakimian A., Opler T., Titman S. The Debt-Equity Choice. Journal of Financial and Quantitative Analysis, 2001, vol. 36, iss. 1, pp. 124. URL: Link
  20. Hsia . Coherence of the Modern Theories of Finance. The Financial Review, 1981, vol. 16, iss. 1, pp. 2742. URL: Link
  21. Jalilvand A., Harris R.S. Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study. The Journal of Finance, 1984, vol. 39, iss. 1, pp. 127145. URL: Link
  22. Jensen M.C., Meckling W.H. Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 1976, vol. 3, iss. 4, pp. 305360. URL: Link90026-X
  23. Jenter D. Market Timing and Managerial Portfolio Decisions. The Journal of Finance, 2005, vol. 60, iss. 4, pp. 19031949. URL: Link
  24. Korajczyk R.A., Levy A. Capital Structure Choice: Macroeconomic Conditions and Financial Constraints. Journal of Financial Economics, 2003, vol. 68, iss. 1, pp. 75109. URL: Link00249-0
  25. Kane A., Marcus A.J., McDonald R.L. How Big is the Tax Advantage to Debt? The Journal of Finance, 1984, vol. 39, iss. 3, pp. 841853. URL: Link
  26. Leland H.E. Corporate Debt Value, Bond Covenants, and Optimal Capital Structure. The Journal of Finance, 1994, vol. 49, iss. 4, pp. 12131252. URL: Link
  27. Post J., Preston L., Sachs S. Redefining the Corporation: Stakeholder Management and Organizational Wealth. Stanford, Stanford University Press, 2002, 376 p.
  28. Myers S.C., Majluf N.S. Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 1984, vol. 13, iss. 2, pp. 187221. URL: Link90023-0

View all articles of issue


ISSN 2311-9438 (Online)
ISSN 2073-8005 (Print)

Journal current issue

Vol. 23, Iss. 3
September 2018