Return to Equity in Project Finance for Infrastructure
Fulbright Economics Teaching Program Working Paper
16 Pages Posted: 10 Mar 2000
Date Written: February 2000
The Vietnamese version is available at: http://ssrn.com/abstract=493985
In project finance, the viability of the project is based on the expected cash flows generated by the project rather than on the strength of the company's balance sheet. Thus, it is relevant to construct the annual cash flow from the equity point of view and estimate the annual returns to the equity holder but the usual simplifications for calculating the cost of capital do not permit the explicit estimation of the annual returns to the equity holder.
In this paper, I relax many of the assumptions in the typical analysis, and provide a simple and practical way to estimate directly the annual returns to the equity holder. This approach requires the calculation of the annual present values of the future cash flows from the point of view of the equity holder. Two equivalent ways for calculating the annual equity values are shown. Most importantly, the construction of the cash flow statement from the equity point of view permits the analysis of the likely impacts of contracts on the risk profile of the project for the equity holder.
JEL Classification: D61, H43, G31, H54
Suggested Citation: Suggested Citation
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By Joseph Tham
By Joseph Tham