Application of the Company’s “Golden Age” Effect in the Economic Practice

Abstract

Taking into account the conditions of the real functioning of companies, one of the most striking effects in financial management is investigated: the “golden age” of the company (when the cost of capital raised is below the perpetuity limit, and the company’s value is higher). With this aim the dependence of cost of raising capital, WACC, on the age of company, n, is studied at various leverage levels, at various values of equity and debt costs, at different frequencies of tax on income payments, p, with advance payments of tax on income and payments at the end of periods, at variable income of the companies. The existence of the weighted average cost of capital, WACC, minimum and its behavior at wide range of above parameters is investigated. All calculations are made within modern theory of capital cost and capital structure by Brusov-Filatova-Orekhova (BFO theory), generalized to the conditions of the real functioning of the company. Practical recommendations for using and maintaining the “golden age” effect are given. It is shown, that “the golden age” depends on the financial indicators of the company. It can change and be controlled by changing parameters such as the cost of capital (equity and debt), frequency and method of tax on income payments, growth income rate etc. The study of the dependence of WACC on the age of the company n, WACC(n), which can only be carried out within the framework of the BFO theory, turns out to be very important in the income approach to business valuation. This allows you to link a retrospective analysis of a company’s financial condition with a representative analysis as part of a business valuation.