Financing (6 points)

Exercise 3. Financing (6 points)

A PPP project to build, operate for 30 years, and transfer back a new university campus has a projected capital expenditure of 40 mln €. The SPV has expected annual revenue of 4.5mln€, annual O&M costs of 0.8mln€, annual general expenses of 0.2mln€. An initial injection of a 5mln€ public funding is made available by the granting authority. Annual interest rate on debt is 10%. Tax on income rate is 35%. The risk profile is considered as medium-low risk because of the liability offered by the granting authority to pay for the fixed granted annual fee (i.e.: the annual revenue for the SPV).
Determine the approximate suitable level of equity participation into the SPV.
Solution:

Total investment = 40 mln

Initial public funding = 5 mln
Total investment for Private Partners = 40-5 = 35 mln
Annual revenue = 4.5
Annual expenses = 0.8 +0.2 = 1 mln
Kd = 10 % Ke = 12%
Tax = 35%
Loan duration: 30 years, Principal : 1/30*D, Interest: 0.1*D

(35*0.12 -0.12*D + 0.1D*0.65) *D= (3.5-0.133D)*35

D = 15.3 mln Euros Equity = 30 mln Euros