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In practice, profit tax payments are (1) made more frequently than annually and (2) can be made in advance. To study the influence of these two factors on the financial indicators of a company, we generalized the Brusov–Filatova–Orekhova (BFO) theory for the case of advance profit tax payments with an arbitrary frequency for the first time. Using modified BFO formulae, we showed that all financial indicators of a company, such as company value, the weighted average cost of capital (WACC) and equity cost (ke), depend on the frequency of the profit tax payments. We found that the WACC increased with the payments and the company value decreased with the payments. This meant that more infrequent payments could be beneficial for the company. The tilt angle of the equity cost (ke(L)) also increased with the payments. Depending on the age of the company, the equity cost either decreased with L for all payment frequencies or increased for some frequencies. We compared the obtained results to those that we described recently for profit tax payments at the end of the financial period and found them to be totally different. We found that in spite the fact that the WACC decreased with the payments and the company value increased with the payments, the WACC value in this case turned out to be bigger and the company value turned out to be smaller than in the case of advance profit tax payments of any frequency. This underlined the importance of advance profit tax payments. Regulator recommendations were also developed to encourage the practice of advance profit tax payments due to the understanding of the benefits of this for both parties: the companies and the state. A new effect was discovered: the decrease in equity cost with an increase in the level of leverage (L). Full article

Recently Brusov et al. have developed innovative investment models that are very close to investment practice. Investment models with frequent payments of tax on profit and of interest on debt at the ends of periods have been considered. However, in practice, payments of tax on profit as well as of interest on debt could be made in advance. In the current paper, we developed, for the first time, innovative investment models with frequent advance payments of tax on profit and of interest on debt and studied the impact of these types of payments on investment project effectiveness. Numerical calculations carried out for four innovative investment models (without split flows) showed that, in the case of advance frequent payments of income tax and interest on debt, all the results related to the effect of the number of payments of income tax and interest on debt on the investment projects’ effectiveness were opposite to the results in the case of payments at the end of the periods obtained by Brusov et al. in the previous article. Thus, this means that the method of payments of tax on profit and of interest on debt (in advance or at the ends of periods) changes drastically the effect of the number of payments of income tax and interest on debt on the investment effectiveness. The verification developed by us for the new models with frequent advance payments of tax on income helps create a comprehensive system of correct valuation of the investments’ effectiveness for two schemes for payments of income tax (in advance or at the ends of periods). The obtained results help the tax regulator (Finance Ministry) understand the influence of the frequency of payments of tax on income and the credit regulator (Central Bank) understand the influence of the frequency of payments of interest on debt on the investment projects’ effectiveness. This allows them to modify and improve tax legislation and credit policy, respectively. Full article