EMPIRICAL TESTING OF COMPROMISE APPROACH TO MANAGEMENT OFCAPITAL STRUCTURE

Abstract

In this paper, various models of financial leverage justification are tested within thecompromise approach on the example of a Russian public company. There are three classical methods tested in the paper: the assessment of the WACC, adjusted present value (APC), and the volatility of EBIT. The second method uses two different options for costs of financial difficulties estimating: through EBIT volatility and through the probability of default. PAO Magnit public holding company is selected as the research object, since it operates in growing markets and has no state injections, and that is significant from the point of view of the compromise approach. The obtained results differ significantly. The WACC assessment method using the rating refinement has turned to be the only method with the estimations close to the real financial leverage of PAO Magnit. The EBIT volatility based methods have given higher estimates of acceptable debt levels, partly due to a relatively short observation period. In conclusion, the advantages and disadvantages of each method are highlighted.