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Innovative Investment Models with Frequent Payments of Tax on Income and of Interest on Debt

Author

Listed:
  • Peter Brusov

    (Department of Mathematics, Financial University under the Government of Russian Federation, 125993 Moscow, Russia)

  • Tatiana Filatova

    (Department of Financial and Investment Management, Financial University under the Government of Russian Federation, 125993 Moscow, Russia)

  • She-I Chang

    (College of Management, National Chung Cheng University, Chiayi 621301, Taiwan)

  • George Lin

    (College of Management, National Chung Cheng University, Chiayi 621301, Taiwan)

Abstract

New modern investment models are created to be as close as possible to real investment conditions. We consider long-term as well as arbitrary duration models with payments of interest on debt and of tax on income a few times per year (semi-annually, quarterly and monthly), which could be applied in real economic practice. Their verification will lead to the creation of a comprehensive system of adequate and correct assessment of the effectiveness of the company’s investment program and its investment strategy. One of the most important elements of calculating the effectiveness of investment projects is the assessment of the discount rate, the calculation methods of which are generalized for the real conditions of the implementation of investment projects. We consider the effectiveness of the investment project from two points of view: the equity owners and the owners of equity and debt. NPV for each of these cases is calculated by two different methods: with the separation of credit and investment flows (and thus discounting the flows using two different rates) and without such separation (with discounting of both flows using the same rate, and WACC can be chosen as the rate). Numerical calculations, conducted for four investment models (without flow separation) show that: (1) in the case of considering the effectiveness of an investment project for owners of equity capital, the increase in the number of payments of tax on income and of interest on debt p leads to a decrease in NPV: this means that the effectiveness of an investment project decreases with p; (2) in the case of considering the effectiveness of an investment project for owners of equity and debt capital, the increase in the number of payments of tax on income and of interest on debt p leads to an increase in NPV: this means that the effectiveness of an investment project increases with p. In the former case, companies should pay tax on profit and interest on debt once per year, while in the latter case, more frequent payments are profitable for the effectiveness of investment. Eight innovative investment models created in this paper can assist decision-makers in the optimal design, planning and control of company investments and the development of a company’s investment strategy.

Suggested Citation

  • Peter Brusov & Tatiana Filatova & She-I Chang & George Lin, 2021. "Innovative Investment Models with Frequent Payments of Tax on Income and of Interest on Debt," Mathematics, MDPI, vol. 9(13), pages 1-22, June.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:13:p:1491-:d:582177
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    References listed on IDEAS

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    1. Stephen Bond & Costas Meghir, 1994. "Dynamic Investment Models and the Firm's Financial Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 197-222.
    2. Peter Brusov & Tatiana Filatova & Natali Orekhova & Mukhadin Eskindarov, 2015. "Modern Corporate Finance, Investments and Taxation," Springer Books, Springer, edition 127, number 978-3-319-14732-1, January.
    3. Dotan, Amihud & Ravid, S Abraham, 1985. "On the Interaction of Real and Financial Decisions of the Firm under Uncertainty," Journal of Finance, American Finance Association, vol. 40(2), pages 501-517, June.
    4. Peter Brusov & Tatiana Filatova & Natali Orehova & Nastia Brusova, 2011. "Weighted average cost of capital in the theory of Modigliani-Miller, modified for a finite lifetime company," Applied Financial Economics, Taylor & Francis Journals, vol. 21(11), pages 815-824.
    5. Whited, Toni M, 1992. "Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-1460, September.
    6. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    7. Marcos Escobar-Anel & Andreas Lichtenstern & Rudi Zagst, 2020. "Behavioral portfolio insurance strategies," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(4), pages 353-399, December.
    8. repec:bla:jfinan:v:43:y:1988:i:2:p:357-73 is not listed on IDEAS
    9. Peter Brusov & Tatiana Filatova & Natali Orekhova & Mukhadin Eskindarov, 2018. "Modern Corporate Finance, Investments, Taxation and Ratings," Springer Books, Springer, edition 2, number 978-3-319-99686-8, January.
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    Cited by:

    1. Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "Capital Structure Theory: Past, Present, Future," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 9-50, Springer.

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