Chapter 4 - Capital structure and last bit

Question 1

Railway capital structure comprises of:

Answer 1

long-term liabilities + equity

Question 2

Long-term liabilities include:

Answer 2

debt, pensions, obligations

Question 3

Why do capital investors have more risk?

Answer 3

Investors only paid after debt holders and require a higher rate of return than is paid on debt. Look at debt/equity ratio

Question 4

Ultimately railway financial sustainability is determined by:

Answer 4

Revenues and expenses

Question 5

What are the key questions we have to ask to evaluate the financial sustainability of railways? How do we answer them

Answer 5

1. Do railway operations make or lose money
2. Do they generate sufficient funds to finance investment, service debt and equity?

(a) look at EBITDA and EBIT.
EBITDA indicates whether revenues cover expenses, netting any funds for investment, debt or taxes. The working ratio monitors this relationship - values below 1 indicating that funds are generated
EBIT (operating profit) indicates whether revenues cover expenses including an allocation for investment (depreciation). The operating ratio monitors this relationship - values below 1 indicating that operating expenses, including depreciation, are covered by revenue.
LEARN RATIOS

Question 6

What is the aim of an economic analysis?

Answer 6

To establish whether a project or policy intervention is worthwhile from an overall social perspective. Comparison between alternate states - ‘with’ and ‘without’ project

Question 7

What are the steps for an economic evaluation?

Answer 7

1. Project scope and stakeholders - describe project, geo and eco sphere of influence, period of analysis
2. Traffic forecast - ‘with’ and ‘without’
3. Determine project benefits - passengers-travel time savings, reliability, comfort
4. Determine project costs - investment, maintenance and operations for ‘with’ and ‘without’
5. Results and sensitivities - calculate NPV, B/C, IRR. Sensitivity analysis for risk