Smart Task 01

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

important basic points that should be learned to pursue a career in
finance?
Ans. Finance is the management of money and includes activities such as
investing, borrowing, lending, budgeting, saving and forecasting. Finance, the
process of raising funds or capital for any kind of expenditure. Consumers,
business firms, and governments often do not have the funds available to make
expenditures, pay their debts, or complete other transactions and must borrow
or sell equity to obtain the money they need to conduct their operations.

The difference between finance and accounting is the accounting focuses on the
day-to-day flow of money in and out of a company or institution, whereas
finance is broader term for the management of assets and liabilities and
planning of future growth.

There are some basic points that should be learned to pursue a career in finance:
 Mathematics Skills
 Analytical skills
 Problem solving skills
 Leadership
 Accounting

2. What is project finance? How is project finance different from

corporate finance? Why can’t we put project finance under corporate
finance? Define 20 terminologies related to project finance.
Ans. Project finance is the funding of long term projects, such as infrastructure
or services, industrial projects, and other through a specific financial structure.
Project finance is the long-term financing of infrastructure and industrial
projects based upon the projected cash flows of the project rather than the
balance sheets of its sponsors.

Project finance is to taking financial decision for a project like sources of funds,
contract with vendors and negotiation whereas corporate finance is the financial
management of an overall company like deciding the financial model of a
company then raising the finance and optimal utilization of funds and
enhancing the working of the company.
Project Finance involves much more extensive due diligence than Corporate
Finance. Project Finance is known as non-recourse financing because you have
no recourse to the sponsors of the project, other than what they contractually
agree to. Project finance greatly minimizes risk to the sponsoring company, as
compared to traditional corporate finance, because the lender relies only on
the project revenue to repay the loan and cannot pursue the sponsoring
company's assets in the case of default.

There are some terminologies related to project finance: -

 Long term debt: Long-term debt is debt that matures in more than one year
and is often treated differently from short-term debt. For an issuer, long-term
debt is a liability that must be repaid while owners of debt (e.g., bonds)
account for them as assets.

 Cash flows: Cash Flow from Investing Activities is cash earned or spent

from investments your company makes, such as purchasing equipment or
investing in other companies. Cash Flow from Financing Activities
is cash earned or spent in the course of financing your company with loans,
lines of credit, or owner's equity.

 Dividend payment: A dividend payment is the distribution of a company's

profits to its shareholders. Dividends are usually paid in cash but sometimes
in company stock, and companies often use them to return profits they don't
need for their operations back to investors.

 Lenders: A lender is an individual, a public or private group, or a financial

institution that makes funds available to a person or business with the
expectation that the funds will be repaid. Repayment will include the
payment of any interest or fees.

 Liquidity ratio: Liquidity ratios measure a company's ability to pay debt

obligations and its margin of safety through the calculation of metrics
including the current ratio, quick ratio, and operating cash flow ratio.

 Equity: Equity represents the value that would be returned to a company's

shareholders if all of the assets were liquidated and all of the company's
debts were paid off. We can also think of equity as a degree of residual
ownership in a firm or asset after subtracting all debts associated with that
asset.
 Debt: Debt is anything owed by one person to another. Debt can involve real
property, money, services, or other consideration. In finance, debt is more
narrowly defined as money raised through the issuance of bonds. A loan is a
form of debt but, more specifically, is an agreement in which one party lends
money to another.

 Non-recourse finance: A non-recourse loan limits the assets of a borrower

that a lender can pursue to recover the loan amount in the event of default. If
the borrower defaults on the loan, the lender can only go after the asset(s)
that were designated as collateral.

 Cost of capital: The cost of capital is the cost of a company's funds, or,
from an investor's point of view the required rate of return on a portfolio
company's existing securities. It is used to evaluate new projects of a
company.

 Project report: Project Report is a written document relating to any

investment. It contains data on the basis of which the project has been
appraised and found feasible. It consists of information on economic,
technical, financial, managerial and production aspects.

 Payback period: The payback period refers to the amount of time it takes to

recover the cost of an investment. Simply put, the payback period is the
length of time an investment reaches a break-even point. ... Shorter
paybacks mean more attractive investments.

 Risk in finance: Risk refers to the degree of uncertainty and/or

potential financial loss inherent in an investment decision. In general, as
investment risks rise, investors seek higher returns to compensate
themselves for taking such risks. Every saving and investment product have
different risks and returns.

 Initial investment cost: Initial investment cost is defined as the amount of

money a business owner needs to start up a business. This money can be
raised in a number of ways, one of which is by selling stocks and shares,
giving people the opportunity to invest in the business and share in the
profit.
 Trade finance: Trade finance allows companies to receive a cash payment
based on accounts receivables in case of factoring. A letter of credit might
help the importer and exporter to enter a trade transaction and reduce the risk
of non-payment or non-receipt of goods.

 Capex: Capital expenditures (Capex) are funds used by a company to

acquire, upgrade, and maintain physical assets such as property, plants,
buildings, technology, or equipment. This type of financial outlay is made
by companies to increase the scope of their operations or add some
economic benefit to the operation.

 Opex: Operating expenses (OPEX) are the day-to-day expenses a company

incurs to keep its business operational. OPEX, which stands for operating
expenses or expenditure, refers to the costs incurred by your business via the
production of goods and services.

 Revenue: Revenue is the total amount of income generated by the sale of

goods or services related to the company's primary operations. Income or net
income is a company's total earnings or profit. Both revenue and net income
are useful in determining the financial strength of a company, but they are
not interchangeable.

3. What is non-recourse debt / loan? What is mezzanine finance, explain

with an example?
Ans. A non-recourse loan limits the assets of a borrower that a lender can
pursue to recover the loan amount in the event of default. If the borrower
defaults on the loan, the lender can only go after the assets that were designated
as collateral for the loan. The lender cannot go after other assets, such as
borrowers personal accounts, in order to recover the total amount of the loan.

Mezzanine finance is a layer of financing that fills the gap between senior debt
and equity in a company. It can be structured either as preferred stock or as
unsecured debt, and it provides investors with an option to convert to equity
interest. Mezzanine financing is usually used to fund growth prospects, such as
acquisitions and expansion of the business.

Example: XYZ Bank provides ABC company, a maker of surgical devices, with
$15 million in mezzanine financing. The funding replaced a higher interest $10
million credit line with more favourable terms. Company ABC gained more
working capital to help bring additional products to the market and paid off a
higher interest debt. XYZ bank will collect 10% a year in interest payments and
will be able to convert to an equity stake if the company defaults.

4. Explain in detail with reasons of what the sectors are or which type of
projects are suitable for project finance?
Ans. By participating in a project finance, each project sponsor pursues a clear
objective, which differs depending on the type of sponsor. In brief, four types of
sponsor are very often involved in such transactions:
 Industrial: They see the initiative as upstream and downstream integrated
or in some way as linked to their core business.
 Public: Central or local government, municipalities, and municipalities
companies whose aims center on social welfare.
 Contractor: Who develop, build, or run plants and are interested in
participating in the initiative by providing equity and or subordinated
debt.
 Financial/investors: invest with a motive to invest capital in high-profit
deals. They have a high propensity for risk and seek a substantial return
on investment.