38 Energy Project Financing: Resources and Strategies for Success
- Depreciation and interest payments are tax-deductible.
- Host owns the equipment.
- The arrangement is good for long-term use of equipment.
“Cons”:- Host takes all the risk and must install and manage the proj-
ect.
Bond
Has the same Pros/Cons as loan, plus:
“Pro”:- Good for government facilities, because they can offer a tax-
free rate that is lower (but considered favorable by inves-
tors).
Sell Stock
Has the same Pros/Cons as loan, plus:
“Pro”:- Selling stock could help the host achieve its target capital
structure.
“Cons”:- Dividend payments (unlike interest payments) are not tax-
deductible. - Dilutes company control.
Use Retained Earnings
Has the same Pros/Cons as loan, plus:
“Pro”:- Host pays no external interest charges. However, retained
earnings do carry an opportunity cost, because such funds
could be invested somewhere at the MARR.
“Con”:- Host loses tax-deductible benefits of interest charges
Capital Lease
Has the same Pros/Cons as loan, pus:
“Pro”:- Has greater flexibility in financing and possible lower cost of
capital with third-party participation.