Return to Equity in Project Finance for Infrastructure

Fulbright Economics Teaching Program Working Paper

16 Pages Posted: 10 Mar 2000

See all articles by Joseph Tham

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy; Academy of Public Administration under the President of the Republic of Kazakhstan

Date Written: February 2000

Abstract

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

Tham, Joseph, Return to Equity in Project Finance for Infrastructure (February 2000). Fulbright Economics Teaching Program Working Paper. Available at SSRN: https://ssrn.com/abstract=212148 or http://dx.doi.org/10.2139/ssrn.212148

Joseph Tham (Contact Author)

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Academy of Public Administration under the President of the Republic of Kazakhstan ( email )

Abay Street, 33a
Astana
Kazakhstan
+7 8 7172753422 (Phone)

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