q. What is project financing?

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q. What is project financing?

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Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions:
q. What is project financing?

Explanation & AnswerSolution by a verified expert

Explanation

Project financing is a funding process where costs of a project are financed through issues of debt and equity. The capital so raised through issues of debt and equity is paid back by the cash flows generated from the project itself. The assets of the project, interests and rights associated with the project are held as a secondary collateral with the investors. It is quite a beneficial process that helps to pay the debt raised for the project subsequently and reduces the liability of the firm.
Generally the investment banks provide the facility of project financing for starting new projects after analysing the company's position, debts, assets, worth and estimated cash flows from the projects in which the bank is investing.

Verified Answer

Project financing is a process where the cost incurred and capital issued for the funding of a project are paid back by the cash flows of the concerned project.

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