Structure of financing investments in the energy sector

Abstract

Abstract. The purpose of this article is to discuss the issues of financing investments in the fuel and energy sector. The manner of financing business activities of every company depends on the decisions made by the management board, which need to take into consideration the effective striving for optimal level of the capital cost. The capital raised by the companies from the aforesaid sector may be in the form of equity or outside capital. This study depicts such sources of capital as bank loans and corporate bonds considered outside capital as well as the issue of shares included in the equity. It is important for the managers making decisions on different types of financing investments in the energy sector to consider the capital cost. The outside capital cost shall be deemed to mean the interest rate on bank loans and corporate bonds, whereas the cost of equity shall be calculated on the basis of the Capital Asset Pricing Model (CAPM). The cost includes both the loss of profit represented by the risk-free rate (which is usually assumed at the level of 10-year old treasury bonds) and the risk to which the capital owner is exposed. The CAPM is usually used for determining the investment risk in a given company. The article shows how the financing structure of the companies from the fuel and energy sector, listed on the Warsaw Stock Exchange, has evolved over the years. The authors also estimated the cost of equity. The results were compared with the chosen mining companies in Poland. Companies from the energy sector have lower investment risk than companies from the fuel sector. Looking at the profitability of investments it should be emphasized that the financing by outside capital is more advantageous than equity financing.

The impact of capital structure on the market value of energy sector companies on the example of companies from Poland

“…This is associated with the fact that a higher debt rate may increase the probability that an enterprise finds itself in a difficult financial situation [4]. There are numerous borrowed capital sources, and the subject has already been discussed [5]. It should also be mentioned that the extent of relying on borrowed capital differs depending on the sector or company [6].…”