Project financing vs. corporate integration : decision-making under operational and financial risks
- The article addresses the choice between setting up a project entity and integrating the project into a corporation from the perspective of a dynamic corporate finance model in the absence of operational syn- ergies. The analysis builds upon a classic continuous-time framework with tax benefits of debt, costs of default and, more innovatively, a benefit or cost of abandonment derived for two projects with stochastic, correlated revenues. By implementing the model with a simulation-based approach, I show that foremost high correlations, high volatilities and high portions of fixed costs as well as heterogenous volatilities, bankruptcy costs and operational cost structures stimulate independent project structures. Further, a more difficult or costly access to external funds raises the benefits of merging activities in a combined firm.
Document Type: | Working Paper |
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Language: | English |
Author: | Maximilian Schreiter |
Chairs and Professorships: | Chair of Mergers & Acquisitions |
URL: | https://www.realoptions.org/openconf2020/data/papers/422.pdf |
Year of Completion: | 2020 |
Tag: | Abandonment options; Default risk; Financial synergies; Optimal capital structure; Project financing; Real options |
Note: | Working Paper |
Content Focus: | Academic Audience |
Licence (German): | ![]() |