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The first serious study (and first quantitative study) of influence of capital structure of the company on its indicators of activities was the work by Nobel Prize Winners Modigliani and Miller. Their theory has a lot of limitations. One of the most important and seriouse assumptions of the Modigliani -Miller theory is that all financial flows as well as all companies are perpetuity. This limitation was lift out by Brusov-Filatova-Orekhova in 2008(Filatova et al. 2008, who have created BFO theory -modern theory of capital cost and capital structure for companies of arbitrary age.Despite the fact that the Modigliani-Miller theory is currently a particular case of the general theory of capital cost and capital structure -Brusov-Filatova-Orekhova (BFO) theory -it is still widely used at the West.In current paper we discuss one more limitation of Modigliani -Miller theory: a method of tax on profit payments. Modigliani -Miller theory accounts these payments as annuity-immediate while in practice these payments are making in advance and thus should be accounted as annuity-due.We generalize the Modigliani-Miller theory for the case of advance payments of tax on profit, which is widely used in practice, and show that this leads to some important consequencies, which change seriously all the main statements by Modigliani and Miller. These consequencies are as following: WACC starts to depend on debt cost kd, WACC turns out to be lower than in case of classical Modigliani-Miller theory and thus company capitalization becomes higher than in ordinary Modigliani-Miller theory.We show that dependence of equity cost on leverage level L is still linear, but the tilt angle with respect to L-axis turns out to be smaller: this could lead to modification of the divident policy of the company.Correct account of a method of tax on profit payments demonstrates that shortcomings of Modigliani -Miller theory are dipper, than everybody suggested: the underestimation of WACC really turns out to be bigger, as well as overestimation of the capitalization of the company. This means that systematic risks arising from the use of modified Modigliani -Miller theory (MMM theory) (which is more correct than "classical' one) in practice are higher than it was suggested by the "classical" version of this theory.

Both main theories of capital cost and capital structure—the Brusov–Filatova–Orekhova (BFO) theory and its perpetuity limit, the Modigliani–Miller theory—consider the payments of tax on profit once per year, while in real economy these payments are made more frequently (semi-annual, quarterly, monthly etc.). Recently the Modigliani–Miller theory has been generalized by us for the case of tax on profit payments with an arbitrary frequency. Here for the first time, we generalized the Brusov–Filatova–Orekhova (BFO) theory for this case. The main purpose of the paper is bringing the BFO theory closer to economic practice, taking into account one of the features of the real functioning of companies, the frequent payments of tax on profit. We derive modified BFO formulas and show that: (1) All BFO formulas change; (2) all main financial parameters of the company, such as company value, V, equity cost, ke, and the weighted average cost of capital, WACC, depend on the tax on profit payments frequency. The increase of the frequency of payments of income tax leads to a decrease in the cost of attracting capital, WACC, and increase in the capitalization of the company, V. At a certain age n of the company and at certain frequency of tax on profit payments p, a qualitatively new anomalous effect takes place: the equity cost, ke(L), decreases with an increase in the level of leverage L. This radically changes the company′s dividend policy, since the economically justified amount of the dividends is equal to the cost of equity. For both parties–for the company and for the tax regulator more frequent payments of tax on profit are beneficial: for the company, because this increases the company capitalization, and for the tax regulator, because earlier payments are beneficial for it due to the time value of money.

For the first time we have generalized the world-famous theory by Nobel Prize winners Modigliani and Miller for the case of variable profit, which significantly extends the application of the theory in practice, specifically in business valuation, ratings, corporate finance, etc. We demonstrate that all the theorems, statements and formulae of Modigliani and Miller are changed significantly. We combine theoretical and numerical (by MS Excel) considerations. The following results are obtained: (1) Discount rate for leverage company changes from the weighted average cost of capital, WACC, to WACC–g (where g is growing rate), for a financially independent company from k0 to k0–g. This means that WACC and k0 are no longer the discount rates as it takes place in case of classical Modigliani–Miller theory with constant profit. WACC grows with g, while real discount rates WACC–g and k0–g decrease with g. This leads to an increase of company capitalization with g. (2) The tilt angle of the equity cost ke(L) grows with g. This should change the dividend policy of the company, because the economically justified value of dividends is equal to equity cost. (3) A qualitatively new effect in corporate finance has been discovered: at rate g < g* the slope of the curve ke(L) turns out to be negative, which could significantly alter the principles of the company’s dividend policy.