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Optimal Capital Structure and Financial Risk of Project Finance Investments: A Simulation Optimization Model With Chance Constraints

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  • Emmanuel Donkor
  • Michael Duffey

Abstract

We investigate the use of chance constraints in modeling the debt financing decision under conditions of debt heterogeneity and uncertainty. We develop a stochastic financial model that uses simulation optimization to select an optimal mix of fixed-rate debt instruments from different sources, with the objective of maximizing net present value (NPV) while limiting default risk. We then use simulation to evaluate the performance of the resulting debt policy. Numerical results from our model indicate that in a world of uncertainty, project promoters who wish to create bankable proposals for project financing, by limiting the probability of default, should spread debt across different maturities.

Suggested Citation

  • Emmanuel Donkor & Michael Duffey, 2013. "Optimal Capital Structure and Financial Risk of Project Finance Investments: A Simulation Optimization Model With Chance Constraints," The Engineering Economist, Taylor & Francis Journals, vol. 58(1), pages 19-34.
    • Handle: RePEc:taf:uteexx:v:58:y:2013:i:1:p:19-34
    DOI: 10.1080/0013791X.2012.742948
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    Cited by:

    1. Krystyna Brzozowska, 2023. "Structure of Financing Public Infrastructure Investments – The Case of Poland," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 635-645.
    2. A. Garcia-Bernabeu & F. Mayor-Vitoria & F. Mas-Verdu, 2015. "Project Finance Recent Applications and Future Trends: The State of the Art," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 14(2), pages 159-178, December.
    3. Krystyna Brzozowska, 2023. "The Financing Structure of Global Infrastructure Projects," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 362-376.
    4. Juan David González-Ruiz & Sergio Botero-Botero & Alejandro Peña, 2022. "Analysis of the Capital Structure in Sustainable Infrastructure Systems: A Methodological Approach," Sustainability, MDPI, vol. 14(19), pages 1-21, October.

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