Ricerc@Sapienza

The organizational procedures of project financing (ex ante definition of the infrastructure project by the private promoter/equity sponsor and the public entity; ex ante definition of the contractual documentation, aimed at risk-sharing and monitoring of cash flows, by the sponsor so to negotiate the cost of bank debt) reduce the risk of distortion of the statistical estimates resulting from the simultaneity that typically exists between the choice of financial arrangement of an investment project and its characteristics.

The cost of capital is one of the most relevant variables in the firm’s valuation models. The well-known models to estimate the cost of capital are based on a defined debt level. Therefore, they can be used only if the debt level is known and constant in the valuation period; consequently, the debt level, cannot be defined based on its effects on the cost of capital.

The default risk ratio (DRR) proposed in this paper tries to define a novel alternative approach to analyze the company capability to face debt obligation by deriving it on the basis of fundamental analysis of the firm rather than the volatility of the asset’s value on the market.
The DRR is defined on the basis of the relationship between debt level and the economic and financial dynamics with regard the Operating and Net Income, Capital Invested and Capital Structure and Free Cash-Flow from Operations and to Equity.