energy finance

traditional stakeholder theory

duty of firm management is to maximize value for equity (investors)

sole proprietorship

• single business owner

• unlimited personal liability

partnership

• multiple business owners

• unlimited personal liability for all partners

• limited partnership has general and limited partners

limited liability company (LLC)

• owners have limited liability

corporation

• separate legal entity

• limited liability

• in case of bankruptcy, control passes from equity holders to debt holders

• ownership is represented by shares of stocks

• owner obtains dividend payments

• double taxation of income (corporate tax and dividend tax)

• accounts for highest percentage of revenue in global markets

capital budgeting

the process of raising and allocating capital

aggregator

raise capital, determine cost of capital by mixing debt and equity

distributor

select assets (projects) to be funded, based on valuation, measured by NPV

financial management tasks

• make investment decisions

• make financing decisions

• manage cash flow

agency

equity investors delegate control rights to management, creating a principal-agent relationship

agency problem

manager might not always act in best interests of stakeholders

equity

ownership

debt

covenant between borrower and lender

3 rules of time travel

1. it’s only possible to compare or combine values at the same point in time

2. to move a cash flow C forward in time n periods, you must compound it

3. to move a cash flow C back in time n periods, you must discount it

perpetuity

a series of equally-spaced and level cash flows that continue forever (ex. preferred stock)

annuity

a series of equally-spaced and level cash flows extending over a finite number of periods (ex. loan repayments)

growing perpetuity

common model used to estimate the value of a firm