GENERALIZATION OF THE MODIGLIANI-MILLER THEORY: MYTH AND REALITY

Abstract

Starting from the contribution made by the Nobel laureates Merton Miller and Franco Modigliani, the issue of interdependences among the capital structure,the cost of capital and firm value and their implementation in the financial models for practical needs has been a topical field of scientific research. During decades, since the breakthrough paper the cost of capital, corporate finance and the theory of investment went to press in 1958, a wide spectrum of publications appeared in leading journals worldwide generalizing the basic model of Modigliani-Miller by relaxing restrictions in initial assumptions.The paper investigates the «The Brusov-Filatova-Orekhova theory» which completely disregards all the findings of previous research generallyrecognized byprofessionals in the field,and claims no less than to generalize the theory of Modigliani - Miller «in a case of companies with an arbitrary lifetime», and to be the first to find «the solution of the problem of weighted average cost of capital, WACC, for the finite valuation horizon». We show that the basic assumptions of «The Brusov-Filatova-Orekhova theory» are insolvent, the theory itself is erroneous and, therefore, all derived conclusions and generalizations are scientifically irrelevant and of no practical significance.

Keywords

• capital structure
• cost of capital
• wacc
• dividend policy
• mm theory