%0 Journal Article
%T A Required Debt Service Coverage Ratio Related to the Economic Value of the Asset Involved
%A Rafael A. Rodr&#237
%A guez
%J Journal of Financial Risk Management
%P 618-642
%@ 2167-9541
%D 2024
%I Scientific Research Publishing
%R 10.4236/jfrm.2024.134029
%X This paper aims to associate the Debt Service Coverage Ratio, <i>DSCR</i>, with the asset value involved. Usually, a minimum <i>DSCR</i> is defined by advisors for debt sizing of projects or as a reference for their risk assessment. Many times, such a definition depends on the investor&#8217;s industrial sector, such as infrastructure, power, etc. Since each project has its own market and risk features, the usual <i>DSCR</i> definition may over or undervalue those features, resulting tight or relaxed financial conditions in view of the project&#8217;s cash flow and risk. An analytical relation is found for relating a required ratio, <i>DSCRr</i>, to the value and risk of the asset involved, which also depends on the cost of debt and corporate tax. The relation is based on the financial criteria that the amount of debt associated to any asset should be smaller than its economic value with a high level of confidence. If the usual <i>DSCR</i> is greater than the <i>DSCRr</i>, the sponsor is sacrificing part of its profitability. If the usual <i>DSCR</i> is smaller than the <i>DSCRr</i>, the lenders are assuming a greater risk than the maximum recommended. The research results should not have relevant limitations. The comparison between usual <i>DSCR</i> and <i>DSCRr</i> could help sponsors and lenders reach an agreement on any financing, especially in project finance. This paper fulfils the need to associate the <i>DSCR</i> with the risk of the debtor and not only to the industrial sector where it operates.
%K <i>DSCR</i>
%K Discounted Cash Flow Valuation
%K Financial Valuation
%K Financial Ratios: Valuation and Prediction
%K Valuation
%K Free Cash Flow
%K Debt Sizing
%U http://www.scirp.org/journal/PaperInformation.aspx?PaperID=137172