1. What is Finance? How Finance is different from Accounting?

What are important basic points

that should be learned to pursue a career in finance?
1. Money, finance are some of the relative terms that we use or come across in our daily
lives, either in discussions, news, or when we are dealing with it for business or any other
important purpose. The ever-growing banking and financial sector which is the backbone
of every economy has set the requirement of an ever-growing pool of financial
professionals for this sector.
2. The difference between finance and accounting is that accounting focuses on the day-to-
day flow of money in and out of a company or institution, whereas finance is a broader
term for the management of assets and liabilities and the planning of future growth.
3. Some basic points that should be known are
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o Asset allocation and diversification.
o Interest.

2. What is project finance? How project finance is different than corporate finance? Why can’t
we put project finance under corporate finance?
1. Project finance is the long-term financing of infrastructure and industrial projects. It is the
analysis of the complete life-cycle of a project. They are most commonly non-recourse
loans, which are secured by the project assets and paid entirely from project cash flow,
rather than from the general assets.
2. The new initiative is financed on the balance sheet (corporate financing). The new project
is incorporated into a newly created economic entity, the SPV, and financed off balance
sheet (project financing)
3. We cant put project finance under corporate finance because project finance is backed
by only the assets that the money is put into & Corporate finance is the backed by balance
sheet of the company that is already operating. The loan value depends upon the
cashflows generated in Project finance & on balance sheet in Corporate Finance.

3. Define 20 terminologies related to project finance.

1. Project Life Cover Ratio - this compares the net present value of the future revenues of
the project against the debt then outstanding;
2. Loan Life Cover Ratio - this compares the net present value of the future revenues during
the agreed term of the loan with the debt outstanding on the day in question. Accordingly,
under this ratio Project co will not be given the credit for revenues which are forecasted
for after the final repayment date of the loan;
3. Drawdown Cover Ratio – this compares the projected maximum debt outstanding with
the forecast net present value of the project cashflows during the term of the loan;
4. Debt Service Cover Ratio - this is usually a historical test which compares the amount by
which the net cashflow for a given period, usually 12 months, has gone over the debt
service requirement (principal amount plus interest).
5. EVA is the amount of added value the project produces for the company’s shareholders
above the cost of the project.
6. Sunk costs, which are expended costs. At a point during the project, sunk costs represent
all money that has been spent till now in the project.
7. The law of diminishing returns proposes that after a certain point, adding more input or
resources will not produce a proportional increase in productivity.
8. Working capital is one of the important financial terms, which is calculated by current
assets minus current liabilities for an organization.
9. Depreciation- Large assets, for example, equipment, vehicles purchased by a company,
lose value over time.
10. The shareholders agreement (SHA) is an agreement between the project sponsors to
form a special purpose company (SPC) in relation to the project development.
11. An off-take agreement is an agreement between the project company and the off taker
(the party who is buying the product / service that the project produces / delivers).
12. Power purchase agreement: commonly used in power projects in emerging markets.
The purchasing entity is usually a government entity.
13. A supply agreement is between the project company and the supplier of the required
feedstock / fuel.
14. Inter creditor agreement is agreed between the main creditors of the project company.
This is the agreement between the main creditors in connection with the project
financing.
15. Common Terms Agreement: An agreement between the financing parties and the project
company which sets out the terms that are common to all the financing instruments and
the relationship between them (including definitions, conditions, order of drawdowns,
project accounts, voting powers for waivers and amendments).
16. Term sheet: Agreement between the borrower and the lender for the cost, provision and
repayment of debt.
17. An operation and maintenance (O&M) agreement is an agreement between the project
company and the operator. The project company delegates the operation, maintenance
 and often performance management of the project to a reputable operator with expertise
in the industry under the terms of the O&M agreement.
18. The concession agreement concedes the use of a government asset (such as a plot of land
or river crossing) to the project company for a specified period.

4. What are non-recourse debt / loan? What is mezzanine finance explain with example.
1. Non-recourse debt is a type of loan secured by collateral, which is usually property. If the
borrower defaults, the issuer can seize the collateral but cannot seek out the borrower
for any further compensation, even if the collateral does not cover the full value of the
defaulted amount. This is one instance where the borrower does not have personal
liability for the loan.
2. Mezzanine financing is a hybrid of debt and equity financing that gives the lender the
right to convert to an equity interest in the company in case of default, generally, after
venture capital companies and other senior lenders are paid.
o For example, Bank XYZ provides Company ABC, a maker of surgical devices,
with $15 million in mezzanine financing. The funding replaced a higher interest
$10 million credit line with more favorable terms. Company ABC gained more
working capital to help bring additional products to the market and paid off a
higher interest debt. Bank XYZ will collect 10% a year in interest payments and
will be able to convert to an equity stake if the company defaults.

5. Explain in detail with reasons of what the sectors are or which type of projects are suitable
fit for project finance?
1. Capital Intensive Financing Scheme: Project Financing is ideal for ventures requiring
huge amount of equity and debt, and is usually implemented in developing countries
as it leads to economic growth of the country. Being more expensive than corporate
loans, this financing scheme drives costs higher while reducing liquidity. Additionally,
the projects under this plan commonly carry Emerging Market Risk and Political Risk.
To insure the project against these risks, the project also has to pay expensive
premiums.
2. Risk Allocation: Under this financial plan, some of the risks associated with the project
is shifted towards the lender. Therefore, sponsors prefer to avail this financing scheme
since it helps them mitigate some of the risk. On the other hand, lenders can receive
better credit margin with Project Financing.
3. Multiple Participants Applicable: As Project Financing often concerns a large-scale
project, it is possible to allocate numerous parties in the project to take care of its
various aspects. This helps in the seamless operation of the entire process.
4. Asset Ownership is decided at the Completion of Project: The Special Purpose Vehicle
is responsible to overview the proceedings of the project while monitoring the assets
 related to the project. Once the project is completed, the project ownership goes to
the concerned entity as determined by the terms of the loan.
5. Zero or Limited Recourse Financing Solution: Since the borrower does not have
ownership of the project until its completion, the lenders do not have to waste time or
resources evaluating the assets and credibility of the borrower. Instead, the lender can
focus on the feasibility of the project. The financial services company can opt for
limited recourse from the sponsors if it deduces that the project might not be able to
generate enough cash flow to repay the loan after completion.
6. Loan Repayment With Project Cash Flow: According to the terms of the loan in Project
Financing, the excess cash flow received by the project should be used to pay off the
outstanding debt received by the borrower. As the debt is gradually paid off, this will
reduce the risk exposure of financial services company.
7. Better Tax Treatment: If Project Financing is implemented, the project and/or the
sponsors can receive the benefit of better tax treatment. Therefore, this structured
financing solution is preferred by sponsors to receive funds for long-term projects.
8. Sponsor Credit Has No Impact on Project: While this long-term financing plan
maximizes the leverage of a project, it also ensures that the credit standings of the
sponsor has no negative impact on the project. Due to this reason, the credit risk of
the project is often better than the credit standings of the sponsor.