1. Chapter 9 Mature companies
Corporate Financial Strategy 4th edition
Dr Ruth Bender
Chapter 9 Mature companies

2. Mature companies: contents
Learning objectives
Financial strategy for a mature company
Characteristics of project finance
Simplified project finance structure
Comparing project finance to a start-up

3. Learning objectives
Explain how the life cycle model relates to a company in the mature stage of its life.
Critique the financial strategy adopted by a mature company, making a decision as to which aspects of the life cycle model are relevant to its circumstances, and why.
Appreciate the theoretical impact on the share price of changing dividend payout ratios.
Understand how project finance works, and why projects are mainly debt-financed.

4. Financial strategy for a mature company
Business risk
Medium
Financial risk
Source of funding
Retained earnings plus debt
Dividend policy
High payout ratio
Future growth prospects
Medium to low
Price/earnings multiple
Current profitability (eps)
High
Share price
Stable in real terms with low volatility

5. Characteristics of project finance
Single purpose asset
Corporate sponsor
Clearly separable, in terms of costs/revenues, and legally
Debt finance, non-recourse

6. Simplified project finance structure
Regulator / Government / Concession authority
All relationships covered by contracts and guarantees
Project Sponsors
(equity)
Project Company
Purchaser(s) of output
Lenders
Plant constructor
Plant operator
Suppliers

7. Comparing project finance to a start-up
Start-up (corporate finance)
Project finance
Business risks
Very high: product, management and market are all unknowns
High during construction phase but low once the project is up and running
Risk managed down through contracts and insurance
Cash flows over life cycle
Negative in launch stage; negative in growth stage; becoming positive by maturity
Negative in construction phase, but positive after that
What we know about future operations
Uncertain, as market trajectory is not known
Reasonable predictability
Often a fixed life
Sometimes a guaranteed minimum income level