Two DCF Approaches for Valuing Companies Under Alternative Financing Strategies (And How to Choose Between Them)

Inselbag, Isik; Kaufold, Howard

doi:10.1111/j.1745-6622.1997.tb00132.x

Cited by 117 publications

(52 citation statements)

References 3 publications

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“…These studies indicate that PF has many advantages in that it lowers the project risk, uncertainty, and agency costs while also resolving overdrafts. Enzo Scannella [12] found advantages of PF as a new financial model, especially in the energy industry [13].…”

Section: Corporate Financing and Project Financingmentioning

confidence: 99%

“…The complexity of PF deals is due to the need to structure a set of contracts that must be negotiated by all of the parties to the project. This also leads to higher transaction costs on account of the legal expenses involved in designing the project structure, dealing with project-related tax and legal issues, and the preparation of necessary project ownership, loan documentation, and other contracts [13]. MF can potentially mitigate PF's disadvantages due to its ability to lower the interest, which is described in greater detail below.…”

Section: Disadvantages Of Pfmentioning

confidence: 99%

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Balancing Project Financing and Mezzanine Project Financing with Option Value to Mitigate Sponsor’s Risks for Overseas Investment Projects

Yoo

Choi

2018

Sustainability

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Abstract:Major steel-making companies in Korea have recently been trying to advance into international markets for better profitability and new market shares. Even with strategic partnerships with local organizations, the Korean steel companies are facing and incurring significant risks which impact their ability to achieve a sustainable profit. The objective of this research is to determine an optimum combination of financial models, specifically Project (PF) and Mezzanine Financing (MF) with an option (convertible bond and bond with warrant). The results of the proposed model can lower interest rates of financing, thereby increasing the profitability of the project investors. To analyze the MF method's effectiveness and proper use, the following three steps are applied: (1) Monte-Carlo Simulations (MCS) using Excel and @Risk software are performed for the Net Present Value (NPV) of the project and its volatility; (2) the Black-Scholes model (BSM) is applied to evaluate MF based on project value; and (3) interest rate of MF is calculated from its option value and is reapplied back to the NPV calculation of the project to determine the effects of MF. Assuming a 50% debt/equity ratio, these simulations were performed on five cases (50% senior debt, 0% MF for a base case then increasing MF and decreasing senior debt by 10% four times). Through this process, using the 10%, MF lowered the borrowing size by 20% and using MF continued to lower the borrowing size up to 40% borrowing when using 40% MF. Based on this result, the researchers support the use of MF to optimize Korean steel international financial models. The resultant data will serve as an effective method to increase net cash flow in overseas steel-plant project investments. This research was performed for a steel plant located in Iran as a case-study, but this optimized financing method using MF with an option product can be applied sustainably not only for overseas investment of steel plants but also any other business, such as oil & gas, power generation, and transportation industries.

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Section: Corporate Financing and Project Financingmentioning

confidence: 99%

Section: Disadvantages Of Pfmentioning

confidence: 99%

Balancing Project Financing and Mezzanine Project Financing with Option Value to Mitigate Sponsor’s Risks for Overseas Investment Projects

Yoo

Choi

2018

Sustainability

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“…Alternatively, the problem can be resolved applying directly the disaggregate asset cash°ow method, because it does not require the market leverage ratio as an input and is more appropriate when target leverage ratios are linked to regulatory measures. Thus, precise assumptions can be made about the dynamic of bank debt in the analytic forecast period (Inselbag & Kaufold 1997). More generally, if a leverage-consistent valuation for banks is required, our model allows us to move from an asset to equity side approach, still considering the e®ects of changes in¯nancial structure on cost of capital and value.…”

Section: Comparing Asset and Equity Cash Flow Method: The Capital Strmentioning

confidence: 99%

Leverage, Cost of Capital and Bank Valuation

Beltrame

Caselli

Previtali

2018

J. Fin. Mngt. Mar. Inst.

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In this paper, we present a model that demonstrates the e®ect of debt on cost of capital and value in the case of banking¯rms. Using a static partial equilibrium setting, both in a steady state and steady growth scenario, we derive a bank-speci¯c valuation metric which separately attributes value to assets and debt cash°ows in the form of a liquidity premium and taxshield. We run our model on a sample of the largest 26 European banks from 2003 to 2016 nding that the value contribution of debt bene¯ts to enterprise value is large and persistent. Further from our model, we derived an implied cost of capital (ICC) measure¯nding consistent results with capital asset pricing model (CAPM). The theoretical framework we present is helpful to address bank debt bene¯ts valuation and to reconcile equity and asset side approaches.

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“…8 See alsoYoung and O'Byrne (2001), p. 37. 9 See alsoLuehrmann (1997),Inselbag and Kaufold (1997). Another DCF method is the total-cash-flow or capital-cash-flow method.…”

mentioning

confidence: 98%

“…This definition does not include a tax term, since tax shields are assumed to be as risky as the company's unlevered cash flows. This is a consequence of the assumption that debt is employed as a target percentage of the company value; seeMiles and Ezzell (1980),Harris and Pringle (1985) andInselbag and Kaufold (1997) for details.…”

mentioning

confidence: 99%