Lecture 05 Flashcards
Cost vs Price
- cost = expense that a busniess incurs in bringing a product or service to market
- price = the amount a customer pays for the product or service → willingness to pay
- difference beween price that is paid and cost that is incurred is the mark up or profit the business makes when item is selled
Economic Perspective vs Financial perspektive
- both perpectives important→ converge in the long term
- but long term is diff. to forecast
Source of financing
- debt providers (lenders) =finance part of a project in return for promise that loans will berepaid with interest from “Cash Flow Available for Debt service ”= sure unless company bankrupt
- equity providers (investors) = finance part of a project, in return for what’s left of Cash Flow Available for Debt Service when debt has been serviced= return only in case of profit = unsure
debt financing - lender charges (Kreditgebühren)
- Base rate/plus margin:
- base rate quarterly London Interbank offered Rate (LIBOR)
- LIBOR is average interest rate which leading banks borrow funds from other banks.
- moste widely used reference rate for short term interest rates
- margin depends on project
- commitment fee
- fee charged by lender to boworrer due to commitment to make a loan
- fee on undrawn amount charged by lender
- …
Gearing ratio
= measurement of a projects financial leverage, which dempnstrates the degree to which a project is funded by debt financing vs. Equity capital
= (Lagterm debt+ shortterm dept ) /shareholders’ equity
= investor like low gearing ratio ( want to do as many projects as possible )
what means high gearing ratio
lenders be concerned about loans at risk so they
- require covenants that prohibit the payment of dividends
- require that excess cshflow be applied to dept repayment
- place restrictions on alternative uses of cah
- require investors to put more equity into the project
Traditionla financing structure
WACC equation
- WACC = weighted average Cost of Capital
- cost of each capital component multiplied by its proportional weight and the summing
- cost of dept alway lower than cost of equity
contractor point of view - revenues
- Down payment :10-15 % by signing contract
- periodical invoices for the remaining part of the work, based on executed WP
- retention money
- counter trade
contracter point of view - costs
- Project start: initial financial effort connected to the need of obtaining the goods required for the project
- periodical financial events(labor/lease cost)
- not periodical financial events(maintance/travel cost)
- periodical fiancial events during a certain supply(payments for supplier material/service/ subcontractors)
Financial outline contractor point of view
- down payment not enough to cover all start up cost
- Financing of the currency until the payment of the executed WP
- use of the guarantee
financial outline - client point of view
- large down payment for long time until project starts to pay back
- down payment and adjustment with the payment for executed work progress
- finding of financial sources
where does discount rate come from ?
societies grow wealtheir→ dollar today is worth than dollar tomorrow
Economic equivalence
- Economic equivalence exists between cash flows that have the same
economic effect and could therefore be traded for one another. - Even though the amounts and timing of the cash flows may differ, the
appropriate interest rate makes them equal in economic sense.
Equation Actualisation and capitalisation
PV = present value
FV= final value
Pav back time (PBT)
= is the lenght of time it takes to recover the cost of an investment
- shorter paybacks mean more attractive investments (longer less desirable)
- link between companysize, ownership and PBT
Net present Value (NPV)
= the difference between the present value of cash inflows and the present value of cash outflows over a period of time (all cashflows )
- used in capital budgeting and investment planning to analyze profiability of project investment
- is the result of calculations used to find today’s value of a future stream of payments
Beispiel IRR berechnung
Project balance(PB)
= progressive balance of income and expenditures
- represents in each period the equivalent net present value pawned in the project
- evaluate the financial solution during project devekopment
