The project has funding. What did the company promise in return?
A company needs THB 1 million to begin the hypothetical investment used in this series. A bank offers THB 400,000 and shareholders provide THB 600,000. The funding column adds up. That still leaves a decision about repayment dates, control, security, and the cash the business must keep available.
I would put those promises beside the investment forecast before signing. A positive project NPV does not move a loan payment to the day the customer eventually pays. Financing changes who bears a shortfall and who can make decisions when the plan goes wrong.
This chapter separates the project's economics from its funding arrangements. It does not recommend a universal debt percentage. The amounts and loan terms below are additional teaching assumptions, not a financing offer or a description of my business.
Debt and equity give investors different claims
Debt normally creates agreed payment obligations. Its exact interest, principal, security, restrictions, and enforcement terms come from the contract and applicable law. Equity gives its holders an ownership interest and a residual claim. It may also carry voting rights, information rights, or negotiated protections. A particular share class needs its own reading.
OpenStax describes capital structure as the mix of debt and equity financing. That definition helps organize the choice, but a balance-sheet label does not tell us whether the arrangement fits the project.
Equity is not free because there is no monthly interest invoice. Its providers give up other uses of their money and expect compensation for risk. Nor does borrowing become cheap merely because its quoted interest rate is below the shareholders' required return. The claims and risks differ.
Keep the cash budget separate from WACC weights
| Use or source | THB | What the amount means |
|---|---|---|
| Equipment and setup investment | 800,000 | Project cash outflow at time 0 |
| Initial working capital | 200,000 | Cash committed at time 0, recovered in year 3 as assumed |
| New loan proceeds | 400,000 | Cash received under the illustrative loan |
| New equity contribution | 600,000 | Cash provided by shareholders |
The 40% loan share here describes where this particular million baht comes from. The earlier WACC of 9.12% used a separate assumption: market-value debt and equity weights of 40% and 60%, a 6% pretax debt cost, a 12% equity cost, and a 20% assumed usable tax deduction. An initial funding ratio is not evidence that those market-value weights are maintained through time.
If the loan amortizes while the business value changes, leverage changes too. We should not keep the same WACC automatically and claim a fully consistent equity valuation from the repayment table below. That would require a financing and discount-rate model that matches the changing policy. Chapter 11 uses a different, explicitly maintained market-value leverage assumption for its cross-check.
Read a repayment calendar, not only the interest rate
For a simple financing illustration, assume the THB 400,000 loan charges 6% on opening principal and repays principal in three nearly equal annual installments. Payments occur at year-end. Ignore fees and other loan charges solely to keep this schedule readable.
Year 1 interest is THB 24,000. Principal repayment of approximately THB 133,333.33 brings the gross year 1 payment to approximately THB 157,333.33. Later interest falls as principal is repaid. The schedule is a cash obligation, not an extra operating expense to insert indiscriminately into the project's FCFF.
The project forecast already measures after-tax cash available before financing flows. Loan proceeds, principal repayment, and shareholder contributions belong in a separate financing budget. A consistent equity cash-flow model would also need the actual interest, available tax effects, and borrowing policy. We have not derived that model just by listing a first-year payment.
| Year | Opening principal | Principal repaid | Interest at 6% | Total payment |
|---|---|---|---|---|
| 1 | 400,000.00 | 133,333.33 | 24,000.00 | 157,333.33 |
| 2 | 266,666.67 | 133,333.33 | 16,000.00 | 149,333.33 |
| 3 | 133,333.34 | 133,333.34 | 8,000.00 | 141,333.34 |
| Total | Do not sum balances | 400,000.00 | 48,000.00 | 448,000.00 |
Cash today creates interest, principal and covenant obligations.
Check cash capacity against repayment dates.
Owner funding shares ownership rights and uncertain returns.
Review ownership, voting rights and investor terms.
A lower rate can come with a harder operating constraint
Before comparing offers, I would ask what happens if acceptance is delayed, a customer disputes an invoice, or the business needs to replace equipment. A payment holiday, committed credit line, shorter notice period, or less restrictive security package can change the usable flexibility. None should be assumed to exist without an agreement.
A covenant may restrict additional borrowing, distributions, or changes to business activities. A guarantee can expose a party beyond the project itself. The owner should identify the exact obligation and obtain the relevant professional review; this chapter does not establish the legal effect of a particular clause.
Equity has its own negotiation. Bringing in a shareholder can share downside and reduce scheduled payments, but may change control, future funding decisions, and exit arrangements. Contributing THB 600,000 does not by itself reveal an ownership percentage. That depends on the agreed valuation, existing ownership, share rights, and transaction terms.
Exercise: the annual forecast is positive, but collection is late
Suppose the project still forecasts THB 450,000 of year 1 operating cash under the shared case, but the customer may pay after the loan installment falls due. Can the company approve the financing because THB 450,000 exceeds THB 157,333.33?
Answer: not from those two annual totals. They do not establish cash availability on the payment date. Ask for dated collections and disbursements, usable opening cash, committed facilities, restrictions, and the consequences of delay. A year-end forecast is not an intrayear liquidity plan.
My proposed decision sheet would name the person responsible for each repayment, the evidence that financing is committed, and the response if cash drops below an approved floor. That floor must come from the business's obligations and risk, not a percentage borrowed from this example.
Read further
Aswath Damodaran's introduction to corporate finance connects investment, financing, and distributions. For the distinction between financing and other cash flows, see the IFRS Foundation's IAS 7 overview. These sources supply concepts; all project amounts and the loan schedule here are hypothetical applications.