Optimal Debt Ratio And Consumption Plan For An Investor In The Presence Of Inflation Risk And Corporate Tax
DOI:
https://doi.org/10.60787/tnamp.v21.509Keywords:
Optimal Debt Ratio, Corporation Tax, Inflation Risk, Optimal ControlAbstract
In this paper, we derive the optimal debt ratio and optimal consumption strategy for an investor in the presence of inflation risk and corporate taxation. The investor is assumed to pay tax on income generated by its asset. The investor’s income is assumed to grow at rate that satisfy a diffusion process. The aim of the investor is to derive the real wealth process which is nominal wealth adjusted for inflation. The resulting real wealth process was solved using dynamic programming approach. As a result, we derive the optimal debt ratio and optimal consumption rate for the investor over time by assuming that the investor chooses a power utility function. We found that the debt ratio depends positively on the corporate tax rate, debt servicing and the volatility of the inflation index. Also, we found that as the risk aversion coefficient increases, the optimal debt ratio will decrease and vice versa. Also, we found that the relationship between the coefficient of risk aversion and the optimal consumption rate is positive.
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