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Financial Management

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by

Xuan Xu

on 25 April 2014

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Transcript of Financial Management

Factors Affecting the Value of the Real Option
1. Shipping Market Factors

Time Charter Rate
New Building Price
Second Hand Price
A Triptych in International Finance: Shipping Investment
Factors Affecting the Value of the Real Option
2. Financial Leverage - debt/equity ratio
provide more equity
INV: high debt - high interest - low remaining cash - less liquidity
Bank: optimal combination of security and remuneration
ships as collateral
Charter Rate Review Mechanism
Factors Affecting the Value of the Real Option
3. Bunker Price
IG - Responsible for Bunker
Uncertainty of Bunker Price increases the risk of IG
IG's profit will decrease because of the additional Bunker cost
Fixture of a Lump Sum Bunker Price
Project Evaluation - IG's Perspective
1. Objective
Secure the use of the vessel
Share 40% of the final proceeds
2. Acceptable Sale Price
IRR ≥ WACC
3. New IRR Calculation
Using WACC 6.38% as discount rate
Acceptable
Calculation of WACC
Rwacc = Equity/(Equity+Debt) x
Rs
+ Debt/(Equity+Debt) x Rb x (1-Tc)
Equity: 3,000,000
Debt: 17,000,000
Rb: Interest rate 8%
Tc: Corperate Tax, 38% in Japan
Rs: cost of capital of leveraged equity ?
Calculation of WACC
Ro = Rf +
β
(Rm - Rf)
Ro: Cost of capital of unleveraged equity
Rf: The risk-free rate, the average rate of 10 year US Treasury Bond for the last 10 years, Rf=6.64%
Rm: Market rate of return, Rm = 12%
β: Sensitivity of the project’s return to the return on the market ?
Hypothesis : Y =α+βX
Y: monthly time charter rate, converted into return
X: monthly BHMI, converted into return
Ro = 9.43%
Rwacc = 6.38%
Project Evaluation - IG's Perspective
Introduction
1. Outline of the Project
Positive expectation towards the market
2. Objective of this Research
INV: 5 new building, 15% equity
Bank: 85% loan
IG: higher charter rate
Analyze the acceptance by measuring 1 vessel
Discuss the possible items subject to further negotiation
Analyze the embedded option
Find out the factors affecting the value of the real option
Profit Share : 50/40/10
Terms subject to further negotiation
Embedded Option and Real Option
Rs =
Ro
+ Debt/Equity x (1-Tc) x (
Ro
- Rb)
Rs = 14.45%
β = 0.52
Project Evaluation - Bank's Perspective
Identity: agent, beneficiary, risk-bearer
4. Interest Rate


Interest rate = LIBOR + Spead
Factors Affecting the Value of the Real Option
Project Evaluation - INV’s Perspective
INV’s USD liquidity is mainly invested in bonds
Criterion to judge the acceptance
if charter out only
If IRR >10-year U.S. Treasury Bond rate
if IRR > RWACC
if sell the vessel
If IRR > 10%
Project Evaluation - INV’s Perspective
in 10-year time charter market
NPV < 0
Payback = 13.13 years
Discounted Payback = 14.97 years
Unacceptable
Project Evaluation - INV’s Perspective
by Selling the vessel at ceiling price
Acceptable
Number of vessel
Time charter period
Time charter rate
Loan Pricing
Embedded Option
INV can trigger a sale of the vessel
Real Option
The sale of the vessel at agreed ceiling prices
Factors Affecting the Value of the Real Option
6. Flag and Tax
to release the burden of corporate tax
Factors Affecting the Value of the Real Option
7. Operation Cost
Manning
Stores
Maintenance
Insurance
Conclusion
The project is acceptable, only by taking the option to sell the vessel.
Some terms need further discussion.
Factors affecting the value of the real option can not be neglected.
Interest Rate
Opex
Remaining Cash
IRR
WACC without tax - 9.43%
WACC with tax - 6.38%
Objective

Guarantee the finance re-steam
Hegde risk
Max profit
Project Evaluation - Bank's Perspective
Initiating the leverage lease
introductory fee & profit sharing
risk (interest rate & currency exchange rate)
Laws of England

Better standpoint in legal case
Acceptable
5. Currency Exchange Rate
Factors Affecting the Value of the Real Option
Suggestion Transaction in USD
Hedge:
Require of INV mortgage
Ships sold: IRR > Interest Rate (8%)
Project Evaluation - INV’s Perspective
Annual Cash Flow = Cash Inflow – Cash Outflow
– Tax + Depreciation

Cash Outflow = Opex/year + Depreciation + Principle + Interest on Principle
+ Balloon
(the 10th year)

Cash Inflow = Time Charter revenue/year

Corperate Tax:
38%
in Japan

Depreciation
: Straight line 15-year amortization

Cash Flow
A Triptych in International Finance: Shipping Investment
YEN/USD
Ship Price in USD
Exp of INV
Opex
Remaining Cash
IRR
Tax
Remaining Cash
IRR
Annual Adjustment
Administration
Full transcript