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

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
3

Assignment 3

The relevance of information memorandum and cashflow 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 projects 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:

Assignment 3
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 SPVs shareholders.
2. Lenders cant count on sponsors to recover loans because limitedrecourse 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 firms 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

The current ratio measures a companys 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
Current assetsInventory
Quick ratio=
Current liabilities

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
7

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 3
Creditors Days
Where:
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
8

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
Total Liabilities
Debt Equity=
Owner ' s Equity

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
Total Liabilities
Debt Asset=
Total Assets

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
9

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

company

generates

Profitability ratios can be

these

profits

(MoneyZine,

2015).

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

10

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 Profits
x 100
Revenues

Where:

Gross Profits = Revenues - Cost of Goods Sold

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 Income
x 100
Revenues

7
11

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 Income
x 100
Revenues

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

12

Assignment 3
more powerful, ratios include the DuPont equation and return on invested
capital (Loth, 2010).

Return on Assets
Return on Assets()=

Net Income
x 100
Total Assets

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

Return on Equity( )=

Net Income
x 100
Stockholder ' s Equity

10

Where:

13

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):
Return on Assets=Profit Margin x Total Asset Turnover x 100

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.

14

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 after Taxes

Invested Capital

12

Where:

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).

15

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 interest taxes

(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 interest taxes

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

13a

16

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 shortterm 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=

Net Operating Income

Total Debt Service

15

17

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, sinkingfund 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).

18

Assignment 3

Summarize

the

key

considerations

in

credit

risk

appraisal
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 selfstanding 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 projects expected
capacity to service debt from project cash flowor, 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

19

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 sponsors 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 projects
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.

20

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).

21

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 projects 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
projects rating, it becomes more complicated because much of the
projects 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

22

Assignment 3
Credit risk appraisal should look at the impact on projects 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).

23

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

24

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

25

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.

26

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.

27