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Project Performance-Based Optimal Capital Structure

Project Performance-Based Optimal Capital Structure

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Published by Royal Projects

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Published by: Royal Projects on Mar 14, 2011
Copyright:Attribution Non-commercial


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Title of Dissertation: Project Performance-Based Optimal Capital StructureFor Privately Financed Infrastructure ProjectsSatheesh K. Sundararajan, Doctor of Philosophy, 2004Dissertation directed by: Assistant Professor Chung-Li TsengDepartment of Civil and Environmental EngineeringPrivately Financed Infrastructure (PFI) projects are characterized by huge andirreversible investments and are faced with various risks. Project performance risks,such as project completion time and costs, affect the project value significantly, par-ticularly in project development phase. This is because a major part of the projectinvestments is made during this phase. Due to high uncertainties in managing theproject performance risks, the selection of optimal financial structure is a challengeto Project Company sponsors and Lenders. Conventional project performance mea-surement and valuation methods cannot capture the dynamics of risk variables andtheir impact on the project value. Without such dynamic performance information,the decision of capital structure may not only be suboptimal, but lead to erroneousresults. This research proposes an uncertainty evolution model, with which the dy-namics of the project performance risk variables can be predicted at any desired timeover the project development phase. A dynamic capital structure model is proposed
that explicitly considers the performance risks and adjusts the capital structure dy-namically to counter the impact of performance risks. Numerical results show thatsuch a model can add a significant value to a PFI project.Two risk-sharing mechanisms are incorporated in the capital structure for a PFIproject: active project management (self-support) and government support. An ac-tive project management method called
dynamic crashing 
is proposed. By dynam-ically controlling the project performance through dynamic crashing, we show thatthe project value can be improved and the chances of potential bankruptcies can bereduced. In addition, the significance of government support as a risk-sharing mech-anism is also modeled, which may be viewed as another means to protect the ProjectCompany against the potential bankruptcies and improves the project value. Numer-ical results are implemented to validate the models. Overall, this research contributesan integrated framework to capital structure decisions for projects with performanceuncertainties.
Project Performance-Based Optimal Capital StructureFor Privately Financed Infrastructure Projects
bySatheesh K. Sundararajan
Dissertation submitted to the Faculty of the Graduate School of theUniversity of Maryland at College Park in partial fulfillmentof the requirements for the degree of Doctor of Philosophy2004Advisory Committee:Assistant Professor Chung-Li Tseng, Chairman/AdvisorAssociate Professor Zhi-Long ChenAssistant Professor Nengjiu JuProfessor Paul M. SchonfeldAssociate Professor Alexander J. Triantis

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