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Running head: Assignment 3

Assignment 3

FERNANDO LUZERNO AUGUSTO CARLOS LICHUCHA

Distance

Learning Doctorate of Finance Program

This assignment is submitted in partial fulfilment of the requirements for 5524S1861 DF Project Finance R2

Running head: Assignment 3 Assignment 3 FERNANDO LUZERNO AUGUSTO CARLOS LICHUCHA Distance Learning Doctorate of FinanceIgor Gvozdanovic July 30, 2016 " id="pdf-obj-0-15" src="pdf-obj-0-15.jpg">

School of Management

Professor Dr. Igor Gvozdanovic

July 30, 2016

Assignment 3

Please answer the following questions in the form of a short essay:

a. Why are (i) information memorandum and (ii) cash-flow analysis relevant in project evaluation? b. Describe in detail, the four types of financial ratios. What is the relevance of each in project evaluation? c. Summarize the key considerations in credit risk appraisal. d. Discuss the following statement “Debt servicing can be impacted by factors such as market prices, inflation rates, energy costs, tax rates”

Assignment 3

Table of Contents

The relevance of information memorandum and cash-flow analysis in project evaluation............4 Information memorandum...........................................................................................................4 Cash-flow analysis.......................................................................................................................5

Describe in detail, the four types of financial ratios. What is the relevance of each in project

evaluation?.......................................................................................................................................6

Liquidity ratios.............................................................................................................................6

Current ratio.........................................................................................................7 Quick ratio............................................................................................................7 Cash Conversion Cycle.........................................................................................7

Debt ratios....................................................................................................................................8

Debt-to-equity ratio..............................................................................................8 Debt-to-asset ratio...............................................................................................9

Profitability ratios........................................................................................................................9

Profit Margin Analysis.........................................................................................10 Balance Sheet Measures of Profitability.............................................................11

Coverage ratios..........................................................................................................................15

Cash flow coverage ratio....................................................................................15 Interest coverage ratio.......................................................................................16 Debt service coverage ratio...............................................................................16 Asset coverage ratio..........................................................................................17

Summarize the key considerations in credit risk appraisal............................................................17 Pre-construction phase credit risk appraisal...............................................................................18 Post-construction phase credit risk appraisal.............................................................................19 Financial strength credit risk appraisal......................................................................................21

Discuss the following statement “Debt servicing can be impacted by factors such as market prices, inflation rates, energy costs, tax rates”...............................................................................22

Market prices /off-take agreements............................................................................................22 Inflation rates/ Inflation Swap and futures.................................................................................22 Energy costs/ put or-pay contracts.............................................................................................23 Tax rates/ before-tax earnings....................................................................................................23

References......................................................................................................................................24

Assignment 3

The relevance of information memorandum and cash- flow analysis in project evaluation

Information memorandum

According to (Gatti, 2008), information memorandum is one of the

documents required for the Initial Due Diligence Phase “with indications of

the main parties involved in the deal (sponsors, constructor, purchasers and

suppliers, banks, insurance companies, etc.) and the financing term sheet”

(p. 77).

According to (Fight, 2006) information memorandum is relevant in project

evaluation because “it explains the project to potential lenders, including

topics such as: experience of the project sponsors; the identity and

experience of the project participants (contractor, operator, suppliers and

off-take purchasers); information on the host government; summaries of the

project contracts; project risks, and how the risks are addressed; proposed

financing terms; the construction budget; financial projections; and financial

information about the project sponsors and other project participants. The

information memorandum is used to sell the loan and to help ‘the

participating banks reach a credit decision, especially small banks that do

not have seasoned credit analysts’” (pp. 82-83).

Therefore, information memorandum forms the basis of every project

evaluation because it summarizes all the key elements of a deal and

Assignment 3

provides all general information on the project and financing and outlines the

content of the project agreements (Fight, 2006).

Cash-flow analysis

(Finnerty, 2007) states that the economic viability of a project depends on

the adequacy of the cash flows generated as compared to the cash flows

that must be expended. Projecting the cash outflows and inflows is a critical

part of this analysis. The timing of the cash inflows and outflows is a

contributing factor. The cash outflows are typically easier to predict. They

occur primarily in the earlier years of the project. The more distant operating

cash inflows are inherently more difficult to predict. Lenders are concerned

about the timeliness of project debt service payments, and equity investors

are concerned about the adequacy of their returns. Cash flow analysis is

used to address both sets of concerns.

For a project financing to be viable, the project’s cash flow must be adequate

both to service project debt in a timely manner and to provide an acceptable

rate of return to equity investors (Finnerty, 2007).

(Gatti, 2008) affirms that Identifying the operative components of cash flow

during the feasibility study is vital for various reasons, inter-alia, the

followings:

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  • 1. Project finance is viable only in light of the size and volatility of flows generated by the initiative and the project uses cash-flows to pay back its loans and pay out dividends to the SPV’s shareholders.

  • 2. Lenders can’t count on sponsors to recover loans because limited- recourse clauses actually prevent any such action.

  • 3. Quantifying operating cash flows is crucial for defining the optimal mix of debt and equity. Operating cash flow generated during the operating life determines the cash available for debt service; consequently it determines the percentage of debt to be used.

Describe in detail, the four types of financial ratios. What is the relevance of each in project evaluation?

Financial ratios are ways of comparing and investigating the relationships

between different pieces of financial information (Ross, Westerfield, & Jaffe,

2008). (Fight, 2006) defines ratios analysis as “the technique of analysing

company performance by calculating financial ratios for historical and

comparative purposes” (p. 192).

(Fight, 2006) covers four types of financial rations relevant to project

evaluation, namely; (i) liquidity, (ii)debt, (iii) profitability, and (iv) covering

ratios.

Liquidity ratios

Generally, companies have two options when they wish to pay for their

current assets and liabilities. They can use trade credit or bank lending

channel to optimize their working capital.

Assignment 3

Liquidity ratios are used to judge a firm’s

ability

to

meet

short

term

obligations (Fight, 2006). There are two main liquidity ratios; current ratio

(Equation 1), and quick ratio (Equation 2). In order to have a deeper

understanding of liquidity, these two main liquidity ratios should be analysed

in conjunction with cash conversion cycle metric (Equation 3),

Current ratio

Current ratio=

Current assets

Current liabilities

1

The current ratio measures a company´s ability to meet short-term

obligations if sales cease. Depending on the industry, a current ratio of 2 or

greater is preferable. If the ratio is less than 1, a company could have trouble

meeting current obligations if sales decline ( Deloitte & Touche LLP Deloitte

&. Idhmatsu, n.d.).

Quick ratio Quick ratio= Current assetsInventory

Current liabilities

2

The quick

ratio

is

similar to the current ratio; however, inventories are

excluded from current assets in the quick ratio calculation because

inventories can become overvalued within a short time frame. Depending on

the industry, a quick ratio of

1 or greater is preferable. If the ratio is less

Assignment 3

than 1, it could be difficult for a company to pay short-term obligations if

sales drop ( Deloitte & Touche LLP Deloitte &. Idhmatsu, n.d.).

Cash Conversion Cycle

Although, the theoretical explanations are feasible, as a going concern a

company must focus on the time it takes to convert its working capital assets

to cash that is Cash Conversion Cycle (Equation 3) which is the true

measure of liquidity (Loth, 2010).

Cash Conversion Cycle = Debtors Days + Total Stocks Days -

Creditors Days Where:

3

Debtors Days =trade debtors/net sales x 365

Stocks Days =raw materials +work in progress +finished goods/cost

of goods sold x 365

Creditors Days = trade creditors/cost of goods sold x 365

This liquidity metric expresses the length of time (in days) that a company

uses to sell inventory, collect receivables and pay its accounts payable. The

shorter this cycle, the more liquid the company's working capital position is

(Loth, 2010).

Liquidity ratios and metrics are important to project evaluation because low

liquidity ratios and metrics can mean that project might have difficulty

meeting its obligations and may not be able to take advantage of

opportunities that require quick cash. On the other hand, high liquidity ratios

and metrics may mean that the project capital is being underutilized and

Assignment 3

could prompt the project to invest the excess capital in projects that drive

growth.

Debt ratios

Generally, companies have two options when they wish to raise money. They

can issue shares of stock, which are also known as equities. Alternatively,

they can issue bonds, which are also known as debt instruments (MoneyZine,

2015). Debt or leverage ratios provide an indication of the long-term

solvency of a company and to what extent a company is using long-term

debt to support its business. There most cited debt ratios are; debt-to-equity

ratio (Equation 4), and debt-to-asset ratio (Equation 5).

Debt-to-equity ratio

Debt ¿Equity=

Total Liabilities Owner 's Equity

4

Debt-to-equity ratio is a measurement of how much suppliers, lenders,

creditors and obligors have committed to the company versus what the

shareholders have committed. This ratio tells the analyst how much debt is

used to finance the company's assets relative to equity. In general, a lower

value offers more protection from creditors if the company falls on difficult

financial times.

Debt-to-asset ratio Debt ¿ Asset= Total Liabilities

Total Assets

5

Debt-to-asset ratio provides insights into the proportion of debt used to

finance the assets of the company. In general, the higher the ratio, the more

Assignment 3

risk that company is considered to have taken on. Generally, it's desirable to

have a debt ratio that is less than 0.5. When a company's ratio rises above

0.5, it is said to be highly leveraged (MoneyZine, 2015).

Debt or leverage ratios are important to project evaluation because are used

by bankers to see how the project is financed, whether it comes from

creditors or your Owner's Equity. In general, a bank will consider a lower ratio

to be a good indicator of the project ability to repay the debts or take on

additional debt to support new opportunities.

It's very common for projects in capital intensive industries to borrow money

to finance their operations. As long as these capital investments provide

additional profits to the business, making interest payments to creditors is

not problematic. However, if the company's business suddenly contracts,

they may not have enough profits to pay creditors (MoneyZine, 2015).

Profitability ratios

The

primary goal of

most companies is to make profits for their owners.

Profitability ratios help analysts, and investors, to understand just how

efficiently a company generates these profits (MoneyZine, 2015).

Profitability ratios can be grouped in two categories (i) Profit Margin

Analysis: Gross Profit Margin, Operating Margin and Net Profits Margin, and

(ii) Balance Sheet Measures of Profitability: Return on Assets, Return on

Equity, DuPont Equation, Return on Invested Capital.

Profit Margin Analysis

Assignment 3

In the income statement, there are four levels of profit or profit margins -

gross profit, operating profit, pre-tax profit and net profit. Profit margin

analysis uses the percentage calculation to provide a comprehensive

measure of a company's profitability. The objective of margin analysis is to

detect consistency or positive/negative trends in a company's earnings.

Positive profit margin analysis translates into positive investment quality

(Loth, 2010).

Gross Profit Margin

Gross Profit Margin ()= Gross Revenues Profits x100

Where:

Gross Profits = Revenues - Cost of Goods Sold

6

Gross profit margin provides insights into how efficiently a company

manufactures a product or supplies a service. As the gross profit margin

approaches 100%, the cost of goods sold approaches zero. Therefore, when

evaluating two projects in similar industries, the project with the higher

margin would be considered more efficient.

Operating Margin

Operating Margin()= Operating Revenues Income x100

7

Assignment 3

Where:

Operating Income = Gross Profits - Operating Expenses

Operating Margin provides insights into how Management is controlling

operating expenses than its cost of sales outlays. Thus, when evaluating

projects operating profit margin need to be scrutinized carefully and a

company's operating income margin is often the preferred metric (deemed to

be more reliable) of investment analysts, versus its net income figure (Loth,

2010).

Net Profits Margin

Net Profits Margin()= Net Revenues Income x 100

8

Net Profits Margin tells the investor / analyst how much profit is generated

divided by the total revenues of the business. Since it includes both

expenses and income sources that are not part of the company's core

business, it is relegated to a second tier measure. It's an interesting metric

to monitor, but really doesn't align with a company's ability to efficiently turn

revenues into profits (Loth, 2010).

Balance Sheet Measures of Profitability

While the first three ratios examined the relationship of revenues and

income, there are additional measures that rely both on the income

statement as well as the balance sheet. Some of the more familiar metrics

include return on assets and return on equity. The less familiar, but perhaps

Assignment 3

more powerful, ratios include the DuPont equation and return on invested

capital (Loth, 2010).

Return on Assets

Returnon Assets()=

Net Income

Total Assets x 100

9

Where:

Total Assets = the average total assets of the company, typically found

by adding two yearend values for total assets and dividing by two.

The

return

on assets

(ROA) ratio illustrates how well management is

employing the company's total assets to make a profit. The higher the

return, the more efficient management is in utilizing its asset base (Loth,

2010).

The

return on assets

(ROA)

ratio

is

a

very important metric for project

evaluation in that it tells how much the funding will be remunerated

regardless whether debt or equity.

Return on Equity

Returnon Equity( )=

Net Income

Stockholder ' s Equity x 100

Where:

10

Assignment 3

Stockholder's Equity = the average shareholders' equity throughout

the year, typically found by adding two year end values and dividing by

two.

Return on equity ratio indicates how profitable a project is by comparing its

net income to its average shareholders' equity. The return on equity ratio

(ROE) measures how much the shareholders earn for their investment in the

project. The higher the ratio percentage, the more efficient management is

in utilizing its equity base and the better return is to investors.

DuPont equation

The DuPont Equation is a complex, but powerful ratio. The measure begins

by looking at the company's return on assets (ROA):

Returnon Assets=Profit Margin x Total Asset Turnover

x100

11

This equation can be expanded several times until it takes its final form:

ROA = ((Sales - Total Costs) / Sales) x (Sales / (Current Assets + Non-Current

Assets))

The power of this measure is its ability to identify the strengths and

weaknesses of a company. The first part of this equation tells the analyst

how efficiently a project uses its assets to produce profits. Current assets

include cash, accounts receivable, inventories, and marketable securities,

while non-current assets include items such as buildings, land, and

machinery / equipment.

Assignment 3

The second part of this equation tells the analyst how working capital and

long-term, income-producing assets are used to help maintain the project's

operation.

Return on invested capital

The calculation of ROIC is more complex than ROE and ROA. The equation

for this measure appears below:

ROIC= Net Operating Profit afterTaxes

Invested Capital

Where:

12

Net Operating Profit after Taxes (NOPAT) = Operating Profit x (1 - Tax

Rate)

Invested Capital (IC) = Fixed Assets + Non-Cash Working Capital

Non-Cash Working Capital = Current Assets - Current Liabilities - Cash

NOPAT allows the investor to calculate a profit figure that takes into

consideration the company's capital structure. The denominator of the ROIC

equation contains invested capital. This includes fixed assets such as plant,

property and equipment. Non-cash working capital contains assets such as

accounts receivable and inventory (Loth, 2010).

Assignment 3

Return on equity tells the investor the amount of net income generated for

the shareholders' equity in the company. Unfortunately, ROE doesn't tell the

investor how much debt (leverage) the company is using to generate those

profits. ROIC eliminates much of the noise that limits some of the other

return calculations. The measure focuses on the income-generating assets

of the company (Loth, 2010).

Coverage ratios

Coverage ratios measure the ability of a company to generate cash flow in

excess of its financing commitments (Fight, 2006). Common coverage ratios

include the cash flow coverage ratio (Equation 13 and 13a) (Fight, 2006),

interest coverage ratio (Equation 14), debt service coverage ratio (Equation

15) and the asset coverage ratio (Equation 16) (Loth, 2010).

Cash flow coverage ratio

Cash flow coverage ratio= Annual cash flow before interesttaxes

(Interest+ principal payments)

13

Bankers typically like to

see a

cash flow coverage

ratio at a minimum

of

150%. This ratio can be further refined to take into account the tax

implications on cash flow:

Cash flow coverage ratio=

Annual cash flow before interesttaxes

(Interest principal+ payments[1/(lincome tax rate)])

13a

Assignment 3

Cash flow coverage ratio compares a company's operating cash flow to its

total debt, which, for purposes of this ratio, is defined as the sum of short-

term borrowings, the current portion of long-term debt and long-term debt.

This ratio provides an indication of a project's ability to cover total debt with

its yearly cash flow from operations. The higher the percentage ratio, the

better the project's ability to carry its total debt (Loth, 2010).

Interest coverage ratio

Interest coverageratio= Earningsbefore interesttaxes(EBIT )

Interest expenses

14

The interest coverage ratio is used to determine how easily a project can pay

interest expenses on outstanding debt. The lower the ratio, the more the

project is burdened by debt expense. When a project's interest coverage

ratio is only 1.5 or lower, its ability to meet interest expenses may be

questionable (Loth, 2010).

The ability to stay current with interest payment obligations is absolutely

critical for a project acceptance by the lenders.

Debt service coverage ratio

Debt service coverageratio= NetOperating Total Debt Service Income

15

Assignment 3

Debt-Service Coverage Ratio is a measure of the cash flow available to pay

current debt obligations. The ratio states net operating income as a multiple

of debt obligations due within one year, including interest, principal, sinking-

fund and lease payments (Loth, 2010).

Debt-Service Coverage Ratio is critical for project evaluation in order to

attract foreign investments.

Asset coverage ratio

Asset coverage ratio= (Assets – Intangible Assets)(Current Liabilities – Shortterm Debt)

Total Debt

16

Asset coverage ratio measures how well a project can cover its short-term

debt obligations with assets. A project that can cover its debts with assets,

that is, the project that has more assets than it does short-term debt, is the

better project. The more times it can cover this debt, the better. So, a project

with a high asset coverage ratio is considered to be less risky than a project

with a low asset coverage ratio (Loth, 2010).

In summary, cover ratios are indicators of financial sustainability of the

capital structure (and repayments on financing sources) to realize a project

finance deal (Gatti, 2008).

Assignment 3

Summarize

the

appraisal

key

considerations

in

credit

risk

According to (Gatti, 2008) credit risk appraisal intends to ascertain the

financial sustainability of a given structured transactions, or specialized

lending (SL) given that “valuing a project-financed initiative on a self-

standing basis (not taking into account guarantees in the form of sponsors’

assets) calls for a creative approach to the issue of quantifying and

managing credit risk” (p. 289). (Finnerty, 2007) affirms that the amount of

debt (credit )the project can raise is a function of the project’s expected

capacity to service debt from project cash flow—or, more simply, its credit

strength derived from “(1) the inherent value of the assets included in the

project, (2) the expected profitability of the project, (3) the amount of equity

project sponsors have at risk (after the debt financing is completed), and,

indirectly, (4) the pledges of creditworthy third parties or sponsors involved

in the project” (p. 74).

Thus, project finance credit risk appraisal is characterized by specific

features that suggest that such deals should be treated differently from

corporate exposures (Gatti, 2008). On these specific features of project

finance credit risk appraisal, (Fight, 2006) suggests the following general

considerations applied to a) pre-construction phase, b) post-construction,

and c) Financial strength.

Pre-construction phase credit risk appraisal

Assignment 3

In the pre-construction phase, the credit risk appraisal should pay attention

to a) the experience and reputation of project sponsor, b) engineering and

design Lenders, c) construction contracts.

Experience and reputation of project sponsor – credit risk

appraisal should look at the project sponsor’s experience in similar

projects given the project unique risks, and an industry reputation for

project support and completion, ‘on spec and on time’ (Fight, 2006).

Engineering and design Lenders - credit risk appraisal should

assure that any technology being used in the project is of a reliable

and proven design, as evidenced by a solid track record of similar

installations and new technology should be carefully analysed for any

potential weaknesses and this increased risk should be reflected in the

facility pricing (Fight, 2006).

Construction - credit risk appraisal should ensure that construction

contracts include performance guarantees and warranties, as well as

penalty and damage payments sufficient to ensure the project’s

acceptance within the established schedule and budget (Fight, 2006).

Post-construction phase credit risk appraisal

In the post-construction phase, the credit risk appraisal should pay attention

to a) operations and management, b) experience and resources of operator,

c) price and supply of raw materials, d) off-take contracts, e) equity

contributions, f) value of project assets as collateral, g) competitive market

exposure, and h) counterparty exposure.

Assignment 3

Operations and management - credit risk appraisal should pay

attention to how an owner/operator plans to operate and maintain a

facility during start-up and the early years of a project in particular

should ensure a management team with experience and a proven

track record in management of the facility (Fight, 2006).

Experience and resources of operator - credit risk appraisal should

ensure that the entity operating the project must possess sufficient

experience and reputation to operate it at the levels necessary to

generate cash flow at projected levels and that it also have the

necessary financial solidity to support operating guarantees and other

contractual obligations (Fight, 2006).

Price and supply of raw materials - credit risk appraisal should

ensure that the supply of raw materials is at a cost within the

acceptable ranges of financial projections and anything which can

adversely impact this supply needs has to be identified as a risk, and

mitigated if possible (Fight, 2006).

Off-take contracts - credit risk appraisal should ensure that

contractual documentation governing the off-take contracts are known

by the lender particularly the sections dealing with the adequacy of

payments to cover operating costs, and service the debt (Fight, 2006).

Equity contributions - credit risk appraisal should specify the timing

and certainty of the equity funding in order to optimally schedule the

timing and dependability of the injection of funds into the project

(Fight, 2006).

Assignment 3

Value of project assets as collateral - credit risk appraisal should

check that the project lender has ensured that the contracts can

enable assets to be assignable, since if there is a foreclosure, the

contracts will only have value if they can be taken over by the lender

and then sold (assigned) to a future buyer (Fight, 2006).

Competitive market exposure - in order to mitigate adverse

market situations caused by off-take contracts, credit risk appraisal

should ensure that the analysis of a project’s competitive market

position should therefore focus on factors such as industry

fundamentals, commodity price risk, market outlook for demand and

price, foreign exchange exposure and vulnerability to foreign

devaluations, and the ease or difficulty with which new competitors

may enter the industry (Fight, 2006).

Counterparty exposure - credit risk appraisal should be aware that

the analysis of counterparty risk not only becomes critical to a

project’s rating, it becomes more complicated because much of the

project’s strength derives from contractual participation of outside

parties in the establishment and operation of the project structure and

this participation raises questions about the strength or reliability of

such participants (Fight, 2006).

Financial strength credit risk appraisal

Assignment 3

Credit risk appraisal should look at the impact on project´s financial strength

of a) financial risk, b) capitalization and financial flexibility, c) inflation risk, d)

interest rate risk, and e) liquidity risk.

Financial risk - credit risk appraisal should ensure that appropriate

hedging facilities are being considered to mitigate financial risks and

debt servicing risks (Fight, 2006).

Capitalization and financial flexibility - credit risk appraisal should

assess the credit risk rating using the level of leverage and debt

amortization schedules (Fight, 2006).

Inflation risk - credit risk appraisal should build both Inflationary and

noninflationary scenarios to protect projects whose contractual

revenues are linked to inflation risk (Fight, 2006).

Interest rate risk - credit risk appraisal should incorporate the

interest rate risk in sensitivity analyses in order to establish the margin

of flexibility if the project financings rely on a floating reference rate

building (Fight, 2006)

Liquidity risk - credit risk appraisal should demonstrate that the

project has the ability to generate sufficient cash to fund ongoing

activities and debt servicing including the possibility of setting aside a

working capital facility in order to even out revenues subject to

seasonal variations (Fight, 2006).

Assignment 3

Discuss the following statement “Debt servicing can be impacted by factors such as market prices, inflation rates, energy costs, tax rates”

Debt servicing refers to payments in respect of both principal and interest.

Actual debt service is the set of payments actually made to satisfy a debt

obligation, including principal, interest, and any late payment fees (IMF,

2005). The cash flow available to pay current debt obligations is generated

by operations and management decisions undertaken by the project that

draws inputs taken from the environment under certain market prices,

inflation rates, energy costs, tax rates, etc.

Market prices /off-take agreements

Market prices can have a devastating impact on cash flow available for debt

servicing if the prices are not protected from market price fluctuations. One

of the ways to minimize the effects of market volatility is via off-take

agreements that contains mechanisms which can limit market risk such as

guaranteed capacity payments (sufficient to cover fixed and debt service

costs) and guaranteed production levels. Such contracts should protect debt

servicing from risk between the contracted price for the output and the

market price (Fight, 2006). Another way is to use hedging facilities such as

forward sales and futures and options contracts although this will also

increase the overall cost of funding (Fight, 2006).

Inflation rates/ Inflation Swap and futures

Assignment 3

Cash flow available for debt servicing can be influenced by inflation rates to

which sales prices are indexed and can be weakened if inflation falls below

inflation assumptions because the sales fail to grow by the anticipated

(inflation) rate and generate lower than expected cash flows. Inflation can

also pose a threat if the raw materials and inputs of the project are subject to

price hikes.

Inflation risk can be hedged using inflation swaps and futures. An inflation

swap is a derivative used to transfer inflation risk from one party to another

through an exchange of cash flows. In an inflation swap, one party pays a

fixed rate on a notional principal amount, while the other party pays a

floating rate linked to an inflation index, such as the Consumer Price Index

(CPI) (INVESTOPEDIA, n.d.).

Energy costs/ put or-pay contracts

Energy price risk affects all businesses in that they are exposed to the

fluctuating cost of energy. So, one of the ways of protecting cash flow

available for debt servicing from the fluctuating cost of energy is to adopt

put or-pay contracts

Tax rates/ before-tax earnings

Taxes are calculated in function of any agreements and the tax environment

in the country in question. It is important to explain how the tax rate is being

calculated. In such cases, it is essential to know the tax rate in the

jurisdiction in question (Fight, 2006). In the context of debt servicing, the

Assignment 3

minimum amount of before-tax earnings needed to cover the principal

payment can be computed using principal payment dividend by one minus

tax rate.

Assignment 3

References

Deloitte & Touche LLP Deloitte &. Idhmatsu. (n.d.). Financial Ratios -What Do They Mean? Deloits Touche Deloitte & Touche Review. (R. E. Marion, Ed.) Wilton: Deloitte & Touche LLP Deloitte &. Idhmatsu. Fight, A. (2006). Introduction to Project Finance. Great Britain: Elsevier. Finnerty, J. (2007). Project Financing: Asset-Based Financial Engineering (2nd ed.). New York, NY: John Wiley & Sons. Gatti, S. (2008). Project Finance in Theory and Practice Designing, Structuring, and Financing Private and Public Projects. London: Elsevier Inc. IMF. (2005, December 02). External Debt Statistics: Guide for Compilers and Users – Appendix III, Glossary. Retrieved July 20, 2016, from IMF:

http://www.imf.org/external/pubs/ft/eds/Eng/Guide/index.htm INVESTOPEDIA. (n.d.). Iflation Swap. Retrieved July 20, 2016, from INVESTOPEDIA:

http://www.investopedia.com/terms/i/inflation-swap.asp Loth, R. (2010). Financial Ratios Tutorial. Retrieved June 20, 2016, from Investopedia:

http://www.investopedia.com/university/ratios/ MoneyZine. (2015, December 14). Debt Ratios (Leverage Ratios). Retrieved July 20, 2016, from Money Zine: http://www.money-zine.com/investing/investing/debt-or-leverage-ratios/ Ross, S. A., Westerfield, R. W., & Jaffe, J. (2008). Corporate Finance (8th ed.). New York:

McGraw-Hill Irwin.