CONCLUSIONS ON CHAPTER 2 - Investment projects and real options in emerging markets


There are three concepts of determining the discount rate for cash flows of projects and enterprises in general. It can be taken on the basis of real alternative investments of capital or taken as some approved standard value, sometimes differentiated by the types of projects or the degree of their riskiness.

However, the most reasonable approach to solving this problem is to use as a discount rate the cost of the project's capital or the company as a whole. Depending on which method the problem is solved, it can be either the weighted average cost of capital (WACO, or the cost of only the equity of the project or enterprise.

Regardless of which method was used as a basis for calculations, the following tasks must be correctly solved for a correct assessment of investment projects:

• Estimate the cost of equity of the project or corporation;

• correctly determine the cost of borrowed capital;

• justify the financial leverage of the investment project or the corporation as a whole, i.e. the ratio between debt and equity, which is appropriate to use in certain circumstances.

In addition, using the WACC method, you need to modify the formula for calculating the weighted average cost of capital in such a way as to take into account the specifics of the Russian taxation system.

There are several concepts for determining the corporate capital or project cost (methods BUM, DGM, CAPM, APT).

The most simple and practical method for today is the cost model of capital assets (CAPM). However, when you try to apply it in the conditions of the developing US market, you can face a number of difficulties, since getting any parameter of this model (Rf, Rm, & szlig;) is a practical problem.

In this chapter, a description of the methodological framework for the application of CAPM in emerging markets was provided. The most reasonable point of view is that the profitability of a risk-free investment in a certain currency (for example, in US dollars) for an international investor should not depend on the country in which the investment project is carried out. In hard currency, it can be adopted at a level of 5-6% per annum.

Market premium for the risk of investing in shares /? can be differentiated by country depending on the coefficient & szlig; the stock index of the given country in relation to the index of the global market.

Finally, the coefficientless free-for-all ratios (3 for individual industries can be taken at the world average level, assuming that they reflect the relative risk inherent in a particular activity and therefore should be approximately the same for the same types of economic activity.

The cost of borrowed capital companies and the interest rate on corporate debt - in general, different concepts. To correctly calculate the cost and amount of the borrowed capital of an enterprise or project, you need to estimate (exactly or approximately) the market rate for the debt, taking into account the & quot; hidden & quot; payments (commissions and other costs of debt servicing).

The financial lever of the investment project can be justified proceeding from necessity of repayment of a debt by monetary streams from the project with the set factor of coverage.

Simple formulas allow you to estimate the maximum amount of borrowed capital the investment project can calculate and what annual volume of sales should be guaranteed so that the project can expect to receive a certain amount of borrowed capital.

In order to justify the debt repayment schedule, annual coverage factors are applied. They allow you to assess the reliability of the proposed repayment schedule and correct it if necessary.

The corporation's capital structure in the developing market can only partially be motivated by calculations and considerations of maximum benefit. Equally strong influence on it is caused by various imperfections in the financial and commodity markets (underdeveloped infrastructure, bad faith of agent managers, non-payments, etc.), as well as political motives related to maintaining control over the enterprise.

The correct definition of the financial leverage is important for a single project and for the corporation as a whole, since this depends on:

• systematic risk factor for equity capital;

• cost of equity; m.

• Weighted average cost of capital of a corporation or project;

• the value of the firm as a whole or the integral effect of the project.

The mechanism of this influence in the conditions of the developing market was considered in this chapter. О In order to correctly evaluate the project, it is necessary to decide which estimation method should be used as a basis for calculations: use the cash flow from assets and the weighted average cost of capital (WACC method) or the residual flow and the cost of equity (the & pound; /? method).

The estimation of the weighted average cost of capital for a project economically integrated into an operating enterprise is carried out in different ways depending on how large the project budget is relative to the company's budget as a whole and whether the project is typical for the company or belongs to a particular type of activity that is not characteristic for the enterprise.

A change in the financial leverage in the course of project implementation should lead to the fact that at each stage of its implementation the weighted average cost of capital should have changed. However, due to the fact that using the 1/K4Seche method, the debt repayment schedule is not known, it is impossible to predict how the ratio between the project's own and borrowed capital will vary. Therefore, the rate of the discount to change from year to year is in most cases impractical (unless the change in the structure of capital is a strategic goal of the corporation).

The I/LSS method with this approach will allow to determine whether the investor will receive from the project's cash flows to its share of capital the yield ke, and the lender - the rate to

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