|Date: Wednesday, November 01, 2017
Location: 1360 East Hall (4:00 PM to 5:00 PM)
Title: Optimal dividend and investment policy with debt covenants
Abstract: We consider a firm that holds a certain amount of debt to which is associated a financial-ratio covenant between the creditors and the firm. Under this debt covenant, the firm may be audited at any time and must prove that it debt to total assets ratio stays below the limit set by the covenant. If not, the firm is given a grace period during which it has the obligation to bring its ratio back below the set limit. The firm may, for instance, inject more capital to correct the situation. Furthermore, the firm may pay out dividend only when it does not violate the debt covenant. Under this setup, we consider an optimal control problem in which the value of the assets is controlled by the capital injections and the dividend payouts. This gives rise to a system of variational inequalities to which there exists a unique viscosity solution. To complete our analysis, some numerical results are provided.
Joint work with Etienne Chevalier and Alexandre Roch.
Speaker: Vathana Ly Vath