Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit
Abstract
:1. Introduction
1.1. A Literature Review
1.2. Methods and Materials
2. The BFO Theory for Companies with Variable Profit and Advance Tax on Profit Payments
2.1. The Value of a Financially Dependent Company, V
2.2. The Value of a Financially Independent Company, V0
2.3. The Tax Shield Value, TS
3. Results and Discussions
3.1. Calculations of the Equity Cost, ke
- Higher growth rate, g, justifies higher dividends.
- If a company pays income tax at the end of periods, it must pay large dividends.
- If the company pays income tax in advance, dividends should be lower.
3.2. Impact of kd on Financial Indicators
3.2.1. WACC
3.2.2. The Discount Rate, WACC–g
3.2.3. The Company Value, V
3.3. Influence of Company Age, n, on Main Financial Parameters of the Company
3.3.1. WACC(L)
3.3.2. Discount Rate WACC–g
3.3.3. Company Capitalization, V
3.3.4. Equity Cost, ke
3.3.5. Summary of Results
- -
- All curves, WACC(L), start from one point (0; 0.26) at all values of kd. WACC(L) at all values of kd decrease with leverage level L. WACC(L) decrease with kd. This means that tax shield leads to the decrease of the cost of raising capital.
- -
- All curves, (WACC–g)(L), start from one point (0; 0.21) at all values of kd. At all values of kd, (WACC–g)(L) decrease with L. With the increase of debt cost, kd, (WACC–g)(L) decrease. Thus, the tax shield tends to lower the value of the discount rate (WACC–g) and, hence, increase the value of the company, V.
- -
- At all values of kd all curves of the company value V(L) start from one point (0; 285) and increases with leverage level L. V(L) increases with kd. Thus, the tax shield leads to the increase of the company value, V.
- -
- At all values of kd, all curves of equity cost, ke(L), start from one point (0; 0.26) and increase with L. The slope of ke(L) decreases with kd. Thus, kd impacts the dividend policy of the company, because ke determines the economically justified amount of dividends.
4. Conclusions
- The generalization of the BFO theory for the case of variable income with advance payments of income tax.
- Generalized BFO formulas for the main financial parameters of the company have been derived.
- Using the obtained formulas, an investigation of the influence of the growth rate, g; the cost of debt, kd; and the company’s age, n, on the dependence of the company’s financial performance on debt financing, has been conducted.
- A comparison of the obtained results with those for the case of paying income tax at the end of the periods has been performed.
- The development of the recommendations for both companies and regulators on how to pay income tax has been created.
- The developed methodology makes it possible to study companies with growing profits and companies with decreasing profits, which is quite important in practice. Regarding the direction of future research, the proposed theory will be used in the future for a more detailed study of companies with both rising and falling profits.
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
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g Growth Rate | kd Debt Cost | n Company Age | Comparison of (1) and (2) | |||||
---|---|---|---|---|---|---|---|---|
Payments at the Ends of Periods (1) | Advance Payments (2) | Payments at the Ends of Periods (1) | Advance Payments (2) | Payments at the Ends of Periods (1) | Advance Payments (2) | |||
WACC | ↑ | ↑ | ↓ | ↓ | g ≥ 0 | ↑ | ↑ | 1 ≥ 2 |
g ≤ 0 | ↓ | ↓ | ||||||
WACC–g | ↓ | ↓ | ↓ | ↓ | g ≥ 0 | ↑ | ↑ | 1 ≥ 2 |
g ≤ 0 | ↓ | ↓ | ||||||
V | ↑ | ↑ | ↑ | ↑ | g ≥ 0 | ↑ | ↑ | 1 ≤ 2 |
g ≤ 0 | ↑ | ↑ | ||||||
ke | ↑ | ↑ | ↓ | ↓ | g ≥ 0 | ↑ | ↑ | 1 ≤ 2 |
g ≤ 0 | ↓ | ↓ |
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Brusov, P.; Filatova, T.; Kulik, V. Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit. J. Risk Financial Manag. 2023, 16, 208. https://doi.org/10.3390/jrfm16030208
Brusov P, Filatova T, Kulik V. Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit. Journal of Risk and Financial Management. 2023; 16(3):208. https://doi.org/10.3390/jrfm16030208
Chicago/Turabian StyleBrusov, Peter, Tatiana Filatova, and Veniamin Kulik. 2023. "Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit" Journal of Risk and Financial Management 16, no. 3: 208. https://doi.org/10.3390/jrfm16030208
APA StyleBrusov, P., Filatova, T., & Kulik, V. (2023). Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit. Journal of Risk and Financial Management, 16(3), 208. https://doi.org/10.3390/jrfm16030208