Professional Documents
Culture Documents
ENGINEERING ECONOMY
BPK 30902
INDIVIDUAL ASSIGNMENT
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Table Of Content
Title page I
Table of content II
REFERENCES 7
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6.1 INTRODUCTION TO PROJECT FINANCING
Project financing can be define as a form of debt or equity structure that relies
primarily on the projects cash flow for repayment, with the projects assets,
rights and interests held as secondary security or collateral.
The project financing systems have lack in several parts which are:
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6.2 TYPES OF PROJECT FINANCING
In general there are two types of financing methods, which are equity finance and
debt finance. Each of categories includes variety of approaches with their related
advantages, disadvantages or risk and their possible foreseen solutions.
There are many types of project financing method which among them are:
Stock
Bond
Stock and bond
Loan
Counter trade
Build, Operate and Transfer (BOT)
Build-Own-Operate (BOO)
Build-Lease-Transfer (BLT)
Design-Construct (DC)
Design-Build-Operate-Maintain (DBOM)
Design-Build-Finance-Operate (DBFO)
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6.3 DEBT FINANCING
Debt financing occurs when a firm raises money for working capital or capital
expenditures by selling bonds, bills or notes to individuals and/or institutional
investors. In return for lending the money, the individuals or institutions become
creditors and receive a promise the principal and interest on the debt will be
repaid. The other way to raise capital in the debt markets is to issue shares of
stock in a public offering; this is called equity financing.
When a company needs money, it can take three routes to obtain financing: cash,
debt or some hybrid of the two. Equity represents an ownership stake in the
company. It gives the shareholder a claim on future earnings, but it does not need
to be paid back. If the company goes bankrupt, equity holders are the last in line
to receive money. The first investors in line are the lenders. These are the
investors that provide the company with debt financing. The amount of the
investment loan, referred to as the principal, must be paid back. Companies can
obtain debt financing through banks and bondholders.
Debt financing can be difficult to obtain, but for many companies, it provides
funding at lower rates than equity financing, especially in periods of historically
low interest rates. Another perk to debt financing is the interest on debt is tax
deductible. Still, adding too much debt can increase the cost of capital, which
reduces the present value of the company.
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6.4 EQUITY FINANCING
Equity financing is the process of raising capital through the sale of shares in an
enterprise. Equity financing essentially refers to the sale of an ownership interest
to raise funds for business purposes. Equity financing spans a wide range of
activities in scale and scope, from a few thousand dollars raised by an
entrepreneur from friends and family, to giant initial public offerings (IPOs)
running into the billions by household names such as Google and Facebook. While
the term is generally associated with financings by public companies listed on an
exchange, it includes financings by private companies as well. Equity financing is
distinct from debt financing, which refers to funds borrowed by a business.
Equity financing involves not just the sale of common equity, but also the sale of
other equity or quasi-equity instruments such as preferred stock, convertible
preferred stock and equity units that include common shares and warrants.
A start-up that grows into a successful company will have several rounds of
equity financing as it evolves. Since a start-up typically attracts different types of
investors at various stages of its evolution, it may use different equity
instruments for its financing needs.
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REFERENCES: