Ratings: Critical Analysis and New Approaches of Quantitative and Qualitative Methodology

This book offers new approaches to rating non-financial issuers and project ratings using the BFO (Brusov-Filatova-Orekhova) theory of capital cost and structure, along with modern investment models. It critically examines the methodological and systemic shortcomings of current credit ratings and modifies the BFO theory for companies of arbitrary age and the perpetuity limit (Modigliani-Miller theory). It also incorporates financial indicators into the rating methodology, studying the dependence of the weighted average cost of capital (WACC) on financial ratios and company age. This allows for a more accurate assessment of the discount rate, improving the quality and accuracy of rating scores.

Format: Paperback / softback
Length: 369 pages
Publication date: 05 December 2021
Publisher: Springer Nature Switzerland AG

This book presents novel methodologies for assessing non-financial issuers and project ratings based on the BFO (Brusov-Filatova-Orekhova) theory of capital cost and structure, as well as its perpetuity limit (Modigliani-Miller theory). It begins by critically examining the methodological and systemic deficiencies of the current credit ratings of non-financial issuers and project ratings. To enhance the objectivity and accuracy of rating assessments, it modifies the BFO theory for companies of arbitrary age and the perpetuity limit (Modigliani-Miller theory) for rating purposes. The authors also incorporate financial indicators into both the BFO theory and the Modigliani-Miller theory. Within the framework of the modified BFO theory, they conduct a comprehensive study of the dependence of the weighted average cost of capital (WACC), used as the discount rate for discounting financial flows, on various financial ratios, company age, leverage level, and taxation for different values of equity cost and debt cost. This research enables the correct assessment of the discount rate, considering the values of financial ratios.

The utilization of well-established corporate finance theories (BFO theory and its perpetuity limit) offers a transformative opportunity in the rating industry, enabling a shift from predominantly qualitative methods to predominantly quantitative approaches in rating. This transition improves the quality and accuracy of rating scores, contributing to a more robust and reliable assessment of creditworthiness.

By presenting these innovative methodologies, this book makes a significant contribution to the field of credit analysis and risk management. It provides valuable insights for practitioners, policymakers, and researchers seeking to enhance the efficiency and effectiveness of non-financial issuer and project rating processes.

Weight: 587g
Dimension: 235 x 155 (mm)
ISBN-13: 9783030562458
Edition number: 1st ed. 2021