Structure of financing investments in the energy sector

Barbara Kowal,Robert Ranosz,Wiktoria Sobczyk,W Suwała,M Dudek,S Łopata,J Leszczyński

doi:10.1051/e3sconf/20171401009

Abstract

The purpose of this article is to discuss the issues of financing investments in the fuel and energy sector. The manner of financing business activities of every company depends on the decisions made by the management board, which need to take into consideration the effective striving for optimal level of the capital cost. The capital raised by the companies from the aforesaid sector may be in the form of equity or outside capital.This study depicts such sources of capital as bank loans and corporate bonds considered outside capital as well as the issue of shares included in the equity. It is important for the managers making decisions on different types of financing investments in the energy sector to consider the capital cost. The outside capital cost shall be deemed to mean the interest rate on bank loans and corporate bonds, whereas the cost of equity shall be calculated on the basis of the Capital Asset Pricing Model (CAPM). The cost includes both the loss of profit represented by the risk-free rate (which is usually assumed at the level of 10-year old treasury bonds) and the risk to which the capital owner is exposed. The CAPM is usually used for determining the investment risk in a given company.The article shows how the financing structure of the companies from the fuel and energy sector, listed on the Warsaw Stock Exchange, has evolved over the years. The authors also estimated the cost of equity. The results were compared with the chosen mining companies in Poland. Companies from the energy sector have lower investment risk than companies from the fuel sector. Looking at the profitability of investments it should be emphasized that the financing by outside capital is more advantageous than equity financing.

Highlights

Running business activities in the sector of companies operating on the energy and fuel market entails the necessity of making both financial and investment decisions
* Corresponding author: bkowal@agh.edu.pl the investment decision-making process, a company needs to decide on the distribution of funds it managed to raise
An additional benefit derived from the financing of investment activities through outside capital is the fact that the interest paid on the obtained outside capital increases the operating costs of the business run and allows the company to pay lower income tax

Summary

Introduction

Running business activities in the sector of companies operating on the energy and fuel market entails the necessity of making both financial and investment decisions. When considering the source of capital in the context of the investment efficiency, the capital structure determining the financial standing of each entity is not insignificant Companies finance their business activities either from their equity (usually with limited access) or from third party equity, which is cheaper than their equity. The choice of appropriate sources of capital for financing investments in the fuel and energy sector is an important factor, especially that it is characterized by capital intensity and long investment cycle. Their activities are subject to special social responsibility. One of the most popular methods, i.e. CAPM, was used to estimate the cost of equity

Structure of financing

Cost of equity

Findings

Summary