Cost of Equity and Dividend Policy

The economically justified amount of dividends is equal to the equity cost, assuming that investors use a dividend discounting model. The evaluation of the latter is an extremely difficult task. It is possible to do this within modern capital structure theory — Brusov-Filatova-Orekhova (BFO) — or within its perpetual limit — the Modigliani-Miller (MM) theory. After the recent generalization of both theories, taking into account the real conditions of the functioning of the companies, it becomes possible to estimate the cost of equity in these conditions. Dependence of the cost of equity on the level of leverage for different ages of the company, different values of k0 (cost of equity at zero leverage level L) and debt costs, different frequencies of income tax payment, advance payments of income tax and payments at the end of periods, variable income of companies, etc. are being studied. Several very important innovative effects have been discovered, which significantly change the company’s dividend policy. The developed methodology and results will help the company’s management to develop an adequate and effective dividend policy. As well, the approach to dividend theory described here can be applied to business valuation and company value.

1. Мodigliani F., Мiller M.H.The cost of capital, corporate finance, and the theory of investment. The American Economic Review. 1958;48(3):261-297.

2. Мodigliani F., Мiller M.H.Corporate income taxes and the cost of capital: A correction. The American Economic Review. 1963;53(3):433-443.

3. Miller M.H., Modigliani F. Some estimates of the cost of capital to the electric utility industry 1954-57. The American Economic Review. 1966;56(3):333-391.

4. Hamada R.S. Portfolio analysis, market equilibrium, and corporation finance. The Journal of Finance. 1969;24(1):13-31. DOI: 10.1111/j.1540-6261.1969.tb00339.x

5. Miller M.H. Debt and taxes. The Journal of Finance. 1977;32(2):261-275. DOI: 10.1111/j.1540-6261.1977.tb03267.x

6. Farber A., Gillet R., Szafarz A.A. General formula for the WACC. International Journal of Business, 2006;11(2):211-218.

7. Fernandez P.A. General formula for the WACC: A comment. International Journal of Business. 2007;12(3):399-403. URL: https://www.researchgate.net/publication/228255631_A_General_Formula_for_the_WACC_A_Comment

8. Berk J., DeMarzo P. Corporate finance. Boston, MA: Pearson/Addison-Wesley; 2007. 988 p.

9. Harris R., Pringle J. Risk-adjusted discount rates — extensions from the average-risk case. The Journal of Financial Research. 1985;8(3):237-244.

10. Baumol W.J., Panzar J. C., Willig R.D. Contestable markets and the theory of industry structure. New York, NY: Harcourt College Publishers; 1982. 510 p.

11. Black F. Noise. The Journal of Finance. 1986;41(3):528-543. DOI: 10.1111/j.1540-6261.1986.tb04513.x

12. Becker D.M. The difference between Modigliani-Miller and Miles-Ezzell and its consequences for the valuation of annuities. Cogent Economics & Finance. 2021;9(1):1862446. DOI: 10.1080/23322039.2020.1862446

13. Brealey R.A., Myers S.C. Principles of corporate finance. 1st ed. New York, NY: McGraw-Hill Book Co.; 1981. 794 p.

14. Brealey R.A., Myers S.C., Allen F. Principles of corporate finance. 11th ed. New York, NY: McGraw-Hill Book Co.; 2014. 976 p.

15. Bhattacharya S. Project valuation with mean-reacting cash flows. The Journal of Finance. 1978;33(5):1317-1331. DOI: 10.1111/j.1540-6261.1978.tb03422.x

16. Myers S.C. Capital structure. Journal of Economic Perspectives. 2001;15(2):81-102. DOI: 10.1257/jep.15.2.81

17. Filatova Т., Orekhova N., Brusova А. Weight average capital cost in the theory of Modigliani-Miller modified for the end time of the company’s lifetime. Vestnik Finansovoi akademii = Bulletin of the Financial Academy. 2008;(4):68-77. (In Russ.).

18. Brusov P., Filatova T., Orekhova N., Eskindarov M. Modern corporate finance, investments, taxation and ratings. 2nd ed. Cham: Springer-Verlag; 2018. 571 p. DOI: 10.1007/978-3-319-99686-8

19. Brusov P., Filatova T. Capital structure theory: Past, present, future. Mathematics. 2023;11(3):616. DOI: 10.3390/math11030616

20. Brusov P.N., Filatova T., Orehova N., Kulik V. The golden age of the company: (Three colors of company’s time). Journal of Reviews on Global Economics. 2015;4:21-42. DOI: 10.6000/1929-7092.2015.04.03

21. Brusov P.N., Filatova T.V., Orekhova N.P., Kulk V.L. A “golden age’ of the companies: Conditions of its existence. Journal of Reviews on Global Economics. 2018;7:88-103. DOI: 10.6000/1929-7092.2018.07.07

22. Dimitropoulos P. Capital structure and corporate governance of soccer clubs: European evidence. Management Research Review. 2014;37(7):658-678. DOI: 10.1108/MRR 09-2012-0207

23. Luiz K., Cruz M. The relevance of capital structure in firm performance: A multivariate analysis of publicly traded Brazilian companies. Revista de Educação e Pesquisa em Contabilidade. 2015;9(4):384-401. DOI: 10.17524/repec.v9i4.1313

24. Barbi M. On the risk-neutral value of debt tax shields. Applied Financial Economics. 2012;22(3):251-258. DOI: 10.1080/09603107.2011.613754

25. Franc-Dąbrowska J., Mądra-Sawicka M., Milewska A. Energy sector risk and cost of capital assessment — companies and investors perspective. Energies. 2021;14(6):1613. DOI: 10.3390/en14061613

26. Angotti M., de Lacerda Moreira R., Bernardes do Nascimento J., Neto de Almeida Bispo O. Analysis of an equity investment strategy based on accounting and financial reports in Latin American markets. Reficont: Revista de Finanças e Contabilidade da Unimep. 2018;5(2):22-40. (In Portug.).

27. Vergara-Novoa C., Sepúlveda-Rojas J.P., Alfaro M.D., Riveros N. Cost of capital estimation for highway concessionaires in Chile. Journal of Advanced Transportation. 2018;2018:2153536. DOI: 10.1155/2018/2153536

28. Mundi H.S., Kaur P., Murty R.L.N. A qualitative inquiry into the capital structure decisions of overconfident finance managers of family-owned businesses in India. Qualitative Research in Financial Markets. 2022;14(3):357-379. DOI: 10.1108/QRFM 02-2020-0019

29. Sadiq M., Alajlani S., Hussain M.S., Ahmad R., Bashir F., Chupradit S. Impact of credit, liquidity, and systematic risk on financial structure: Comparative investigation from sustainable production. Environmental Science and Pollution Research. 2022;29(14):20963-20975. DOI: 10.1007/s11356-021-17276-x

30. Becker D.M. Getting the valuation formulas right when it comes to annuities. Managerial Finance. 2022;48(3):470-499. DOI: 10.1108/MF 03-2021-0135

31. El-Chaarani H., Abraham R., Skaf Y. The impact of corporate governance on the financial performance of the banking sector in the MENA (Middle Eastern and North African) region: An immunity test of banks for COVID 19. Journal of Risk and Financial Management. 2022;15(2):82. DOI: 10.3390/jrfm15020082

32. Harris R.S., Pringle J.J. Risk-adjusted discount rates — extension from the average-risk case. The Journal of Financial Research. 1985;8(3):237-244. DOI: 10.1111/j.1475-6803.1985.tb00406.x

33. Miles J.A., Ezzell J.R. The weighted average cost of capital, perfect capital markets, and project life: A clarification. Journal of Financial and Quantitative Analysis. 1980;15(3):719-730. DOI: https://doi.org/10.2307/2330405

34. Farber A., Gillet R., Szafarz A. A general formula for the WACC. International Journal of Business. 2006;11(2):211-218.

35. Fernandez P. A general formula for the WACC: A comment. International Journal of Business. 2006;11(2):219.

36. CooperI.A., Nyborg K.G. Consistent valuation of project finance and LBO’s using the flow-to-equity method. European Financial Management. 2018;24(4):34-52. DOI: 10.1111/eufm.12136

37. Brusov P., Filatova T., Kulik V. Capital asset pricing Model 2.0: Account of business and financial risk. Preprints. 2023:2023100347. DOI: 10.20944/preprints202310.0347.v1

38. Brusov P.N., Filatova T.V., Kulik V.L. Capital asset pricing model (CAPM) 2.0: Account of business and financial risk. Finance: Theory and Practice. 2024;28(2):128-142. DOI: 10.26794/2587-5671-2024-28-2-128-142

39. Miller M.H., Rock K. Dividend policy under asymmetric information. The Journal of Finance. 1985;40(4):1031-1051. DOI: 10.1111/j.1540-6261.1985.tb02362.x

40. Hamada R.S. The effect of the firm’s capital structure on the systematic risk of common stocks. The Journal of Finance. 1972;27(2):435-452. DOI: 10.1111/j.1540-6261.1972.tb00971.x

41. Brusov P., Filatova T., Orekhova N. The Brusov-Filatova-Orekhova theory of capital structure: Applications in corporate finance, investments, taxation and ratings. Cham: Springer-Verlag; 2023. 769 p. DOI: 10.1007/978-3-031-27929-4

42. Raimo N., de Nuccio E., Giakoumelou A., Petruzzella F., Vitolla F. Non-financial information and cost of equity capital: An empirical analysis in the food and beverage industry. British Food Journal. 2021;123(1):49-65. DOI: 10.1108/BFJ 03-2020-0278

43. Brusov P., Filatova T., Orekhova N. Generalized Modigliani-Miller theory: Applications in corporate finance, investments, taxation and ratings. Cham: Springer-Verlag; 2022. 362 p. DOI: 10.1007/978-3-030-93893-2

44. Brusov P., Filatova T. Qualitatively new approach to business valuation and company value. Mathematics. 2025;13(1):80. DOI: 10.3390/math13010080

45. Brusov P., Filatova T. Business valuation and company value: New qualitative approaches considering business and financial risks. Cham: Springer-Verlag; 2025. 654 p.