VCE Summer Internship Program 2021

Smart Task Submission Format

[ Download This Format in .DOCX format and then Edit it and SUBMIT ]
Intern’s Details
Name Niharika Mathur

Email-ID mathurnihu99@gmail.com

Smart Task No. 1

Project Topic Financial modelling (infra)

Smart Task (Solution)

Task Q1 : What is Finance? How is Finance different from Accounting? What are important basic points that should
be learned to pursue a career in finance?

Task Q1 Solution : Finance is defined as the management of money and includes activities such
as investing, borrowing, lending, budgeting, saving, and forecasting. Finance is the study and
discipline of money, currency and capital assets. It is related with, but not synonymous with
economics, the study of production, distribution, and consumption of money, assets, goods and
services.
Difference between finance and accounting:
1. Accounting is a methodical record-keeping of transactions of business, whereas finance is the study of
the management of funds in the best possible manner.
2. Accounting is a part of finance whereas finance is a part of Economics.
3. Accounting is mainly concerned that all the financial transactions are recorded in the financial system
with accuracy, whereas finance focuses in Understanding financial data of the enterprise keeping in
mind the growth and strategy.
4. Accounting focuses on past and finance focuses on future.
5. In accounting financial statement is prepared and in finance it is analyzed.

Important points that should be learned to pursue a career in finance:

1. Analytical thinking : Analytical thinking is a crucial skill for finance professionals. It refers to looking
at and understanding a situation to interpret it and deriving an intelligent and thoughtful response. As
a finance professional, you’d have to solve all kinds of problems from technical to interpersonal.
When analytical thinking and problem-solving are your forte, you can devise smart solutions quickly
which would greatly benefit the company, making you its valuable asset. 
2. Accounting skills : Accounting skills refer to the techniques and abilities that allow you to track,
record, and manage financial transactions efficiently and effectively. Many recruiters expect you to
have accounting skills as they are crucial for performing financial analysis, financial reporting, data
management, financial modeling, and plenty of other related tasks.
3. Business intelligence : Finance professionals play a vital role in helping businesses make smart
decisions. To make smart and better-informed decisions, they must know how to predict future
inventory, sales, and related information. This is why companies prefer professionals who are
proficient in leveraging enterprise resource planning software (ERP). ERP tools like Oracle or SAP

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Smart Task Submission Format

are excellent for managing inventory, planning future purchases, allocating labor hours, etc. 

500 Words (Max.)

Task Q2 : 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.

Task Q2 Solution : Project finance is the funding (financing) of long-term infrastructure,

industrial projects, and public services using a non-recourse or limited recourse financial
structure. The debt and equity used to finance the project are paid back from the cash flow
generated by the project. Project finance helps finance new investment by structuring the
financing around the project's own operating cash flow and assets, without additional
sponsor guarantees. Thus the technique is able to alleviate investment risk and raise finance at a
relatively low cost, to the benefit of sponsor and investor alike.

In the early stage of the company, corporate finance is being introduced. When an organization is
just starting up, corporate finance is what suits the company to finance through whereas In the case
of companies that run projects usually seek the help of project financier when they are 3 years or
little less in the operation. At this moment they need expansion.

We can’t put project finance under corporate finance because unlike Corporate Finance, Project
Finance does not or minimally impact the corporate balance sheet because the right to claim on the
assets in the event of failure to repay, extends to only the assets of the project ( and the additional
security offered if any) and not of the parent company.

Terminologies related to project finance:

1. Amortization : Amortization is the reduction of the capital balance or up-front (capitalized)

expenses over time to reflect life-cycle depreciation and obsolescence, often an equal
amount per annum. 
2. Annuity : Repayment of debt where the sum of principal and interest is equal for each
period; also a term used in India for availability payments.
3. Appraisal : An estimate of the value of property made by a qualified professional called an
“appraiser”. Based on an appraiser’s knowledge experience and analysis of the property.

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Smart Task Submission Format

4. Base rate : The Base Rate is the rate of interest used by lenders as a baseline index which
is adjusted either upward or downward pursuant to the terms of the loan.
5. Bond : The paper evidence of a legal promise by the issuer to pay the investor (owner or
holder of the bond) on the declared terms. Bonds are usually negotiable and customarily
long-term, generally between 5 to 25 years. 
6. Break clause : A clause giving a party the right to terminate the contract at a particular
point, often called the “break point”.
7. Bridge financing : A form of short-term or intermediate term interim financing designed to
bridge a gap in financing, usually before long-term financing becomes effective and put in
place.
8. Bullet : A one-time repayment, often after little to no amortization of the loan balance. Also
referred to as a balloon payment.
9. Buy-back : A promise to repurchase unsold production. Alternatively, a promise to repay a
financial obligation.
10. Buyer credit: Financing provided to a buyer to pay for the supply of goods or services,
usually by an exporting country or the supplier company.
11. Capital cost : Costs of financing construction and equipment. Capital costs are usually
fixed, one-off expenses.
12. Capital appreciation : The increase in the value of an asset over time.
13. Capital expenditure : Long-term expenditure on fixed assets such as land, buildings, plant
and equipment.
14. Collateral : Assets pledged as security under a loan or other financing instrument, to assure
repayment.
15. Debt rescheduling : Adjusting the tenor, interest rate or other terms and conditions of a
debt agreement.
16. Drawdown : The obtaining by the borrower of some of the funds available under a credit
facility.
17. Export Credit Agencies : An agency established by a country to finance its national goods,
investment and services. They often offer political risk insurance. Also known as a trade
finance agency.
18. Financial close : In a financing, the point at which the documentation has been executed
and conditions precedent have been satisfied or waived. Drawdowns become permissible
after this point.
19. Floating charge : A form of security taken by a creditor over the whole or substantially the
whole of a company’s assets. 
20. Hurdle rate : Minimum acceptable rate of return on investment.

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Smart Task Submission Format

500 Words (Max.)

Task Q3 What is non-recourse debt / loan? What is mezzanine finance, explain with an
example.

Task Q3 Solution : 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. Because in many cases the resale value of the collateral can dip below the loan balance over
the course of the loan, non-recourse debt is riskier to the lender than recourse debt.

KEY TAKEAWAYS :

 Non-recourse debt is a type of loan that is secured by collateral, which is usually property. 
 Lenders charge higher interest rates on non-recourse debt to compensate for the elevated
risk (i.e., the collateral's value dipping below the amount owed on the loan).
 Non-recourse debt is characterized by high capital expenditures, long loan periods, and
uncertain revenue streams.
 Loan-to-value ratios are usually limited to 60% in non-recourse loans.

Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to
convert the debt to an equity interest in the company in case of default, generally, after venture
capital companies and other senior lenders are paid. In terms of risk, it exists between senior debt
and equity.

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Mezzanine financing bridges the gap between debt and equity financing and is one of the highest-

risk forms of debt. It is senior to pure equity but subordinate to pure debt. However, this means
that it also offers some of the highest returns to investors in debt when compared to other debt
types, as it often receives rates between 12% and 20% per year, and sometimes as high as 30%.
Mezzanine financing can be considered as very expensive debt or cheaper equity, because
mezzanine financing carries a higher interest rate than the senior debt that companies would
otherwise obtain through their banks but is substantially less expensive than equity in terms of the
overall cost of capital. It is also less diluting of the company's share value. In the end, mezzanine
financing permits a business to more more capital and increase its returns on equity.

Example : Mr. Richard Ice cream Parlour

Mezzanine funds can be used to buy a company or expand one’s own business without going for
an IPO.

Let’s say that Mr. Richard has an ice-cream parlor. He wants to expand his business. But he
doesn’t want to go for conventional equity financing. Rather he decides to go for mezzanine
financing.

He goes to mezzanine financiers and asks for mezzanine loans. The lenders mention that they
need warrants or options for mezzanine loans. Since the loans are unsecured, Mr. Richard has to
agree to the terms set by the mezzanine lenders.

So Mr. Richard takes $100,000 by showing that he has a cash flow of $60,000 every year. He takes
the loans and unfortunately defaults at the time of payment since his ice-cream parlor couldn’t
generate enough cash flow. The lenders take a portion of his ice-cream parlor and sell off to get
back their money.

500 Words (Max.)

Task Q4 : Explain in detail with reasons of what the sectors are or which type of
projects are suitable for project finance?

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Task Q4 Solution :
Sector suitable for Project finance :

1. Construction : Project finance has spread worldwide and includes numerous industrial
projects from power stations and waste-disposal plants to telecommunication facilities,
bridges, tunnels, railway networks, and now also the building of hospitals, education
facilities, government accommodation and tourist facilities.
Despite financial assessment of PF projects being fundamental to the lender’s decision, there is
little understanding of how the use of finance is perceived by individual stakeholders; why and how
a financial assessment is performed; who should be involved; where and when it should be
performed; what data should be used; and how financial assessments should be presented.

Current uncertainty in financial markets makes many sponsors of construction project financings
carefully consider bank liquidity, the higher cost of finance, and general uncertainty for demand.
This has resulted in the postponement of a number of projects in certain industry sectors.
Governments have seen tax receipts drastically reduced which has affected their ability to finance
infrastructure projects, often irrespective of the perceived demand. Equity providers still seek to
invest, however there are less opportunities due to market dislocation. Due to the demand for
global infrastructure it is believed that project financings will return to their pre-crunch levels, or
more so, however lenders’ liquidity costs will be passed on to the borrowers. Lenders will also be
under stricter regulation both internally and externally.

2. Marketing sector : A successful marketing and advertising campaign may require a lot
of strategic planning, executional brilliance and a significant monetary budget.  All aspects of
an organization’s marketing efforts need the organization’s investment. A finance manager’s
job is to ensure that all marketing investments are beneficial for the company either in the
short term or the long term. The returns on marketing investment is an important criterion for
approving any marketing campaign and the job of the finance manager is to look into the
potential benefit of any marketing activity. Some would say that marketing and finance is a
match made in heaven. There are several benefits of financial management in the marketing
and advertising domain. 
3. Energy Sector : Project finance (PF), widely used in the energy industry, refers to a special form of
financing for large-scale investment projects, where the debt is repaid from the future income of a
facility under construction, such as a power plant, substation or power transmission line. In this way,
large-scale national and international projects are often financed, such as chemical plants, refineries,
LNG terminals, pipelines, in which different project participants jointly implement a project. For the
implementation of large energy projects, a legally and economically independent project company
(SPV or SPC, Special Purpose Company) is usually established. The equity capital is provided by the

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project sponsors (mainly institutional investors), while the borrowed funds are raised by the company
from other sources. This approach, in particular, is applied in the construction and expansion of solar
power plants and wind farms, which usually consist of several phases, each of which can cost tens
and hundreds of millions of euros and require an individual approach to financing. Each project can
be carried out through the SPC, which is created specifically for this purpose. The bank provides the
company with a large long-term loan, which is repaid after the commissioning of the power plant
from its cash flows.

500 Words (Max.)

Task Q6 :

Task Q6 Solution :

500 Words (Max.)

Please add / delete blocks if needed.

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