Optimal Capital Structure of Power Plant Projects with Various Bargaining Powers in Project Negotiations

Identifying the optimal capital structure or optimal debt ratio for a physical project is a critical issue for decision makers who aim to maximize project worth. The debt ratio initially designed by the project company is finally determined during loan negotiations between project company and loan providers. With simulated data from a power plant project, this study conducted a two-party game model to examine the optimal capital structure with various combinations of bargaining powers between project company and loan providers. The results showed that the combination of bargaining powers between participants in the loan negotiation significantly affects the optimal debt ratio. The debt ratio was higher when the project company had more influence on the bargain, and it reached the highest level when the two parties had equal bargaining power.