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 Mrunalini Vanka

Email-ID 2201220@ipeindia.org

Smart Task No. 1

Project Topic Financial modelling and analysis

Smart Task (Solution)

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

Task Q1 Solution:
Finance is the study of money, investments, and financial resources in diverse organisations such as firms,
individuals, and governments. It entails making decisions regarding obtaining, allocating, and utilising cash in
order to meet financial goals and maximise value.
Finance and accounting are two distinct but linked topics. While both are concerned with financial resource
management, they focus on distinct aspects:

Finance examines the big picture of managing money and assets. It entails examining an organization's
financial needs, making investment decisions, managing risks, and selecting the best sources of resources.
Finance specialists examine financial data, develop financial models, and offer recommendations to improve
financial performance.

Accounting is concerned with recording, summarising, and reporting financial transactions. It is concerned
with the systematic recording of financial data, the preparation of financial accounts, and the adherence to
accounting principles and regulations. Accountants provide precise and dependable financial information,
which is critical for decision-making, tax filing, and external reporting.

Learn to analyse and evaluate financial documents such as the balance sheet, income statement, and cash flow
statement. Learn how these statements provide information about a company's financial health and
performance.

Time Value of Money: Learn about the notion of time value of money, which recognises that a dollar today is
worth more than a dollar tomorrow due to opportunity cost and the possibility for return.

Risk and reward: Learn about the trade-offs between risk and reward. Understand the relationship between
risk and potential rewards in financial decisions, as well as how to properly analyse and manage risks.

Capital Budgeting: Learn how to evaluate investment possibilities and use capital budgeting strategies
including net present value (NPV), internal rate of return (IRR), and payback period.

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 VCE Summer Internship Program 2021
Smart Task Submission Format

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 a form of financing that is used for large-scale infrastructure, energy, and industrial
projects. It entails the establishment of a separate financial structure for a single project, with the cash flows
and assets of the project serving as the principal sources of repayment for the financing.

The following are the fundamental distinctions between Project Finance and Corporate Finance:

Purpose: Project Finance is used to fund specific projects, such as constructing a power plant or a toll road,
with the project's cash flows and assets serving as security. Corporate Finance, on the other hand, is
concerned with a company's overall financial management and continuing operations.

Risk Allocation: Risks are allocated among project stakeholders depending on their ability to bear and
manage them in Project Finance. For repayment, lenders and investors rely mostly on the project's assets and
cash flows. The risks in Corporate Finance are often shared by the corporation and its stockholders.

Cash Flow Dependency: Project finance is significantly reliant on the predicted cash flows of the project to
service the debt and produce returns for investors. Cash flows in Corporate Finance can come from a variety
of sources inside the company's activities and investments.

Asset Ring-Fencing: Ring-fencing the project's assets and cash flows from the broader corporate structure is a
common practise in project finance. This distinction shields the project's lenders and investors from the risks
connected with the company's other operations.

Limited resources: Project Finance often uses limited recourse finance, which means that lenders have limited
claims on the project's assets and cash flows. If the project fails, the lenders may not be able to recoup their
losses through the company's other assets.

terminologies:
 SPV-Special Purpose Vehicle -It is a legal entity with limited liability created to fulfil narrow and
specific objectives.
 Non-Recourse-Nonrecourse finance is a type of commercial lending that entitles the Lander to repay
only from the profits of the project the loan is funding and not from any other assets of the borrower.
 Hedging counterparty – The financial institution providing interest or currency rate hedging to a
borrower.

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 Mezzanine lenders- it is a hybrid of debt and equity financing that gives the lender the right to convert
the debt into equity interest in the company in case of default.
 Mini Perm Lending-A type of short-term real estate financing used to pay off income producing
construction or commercial properties.
 DSCR- Debt Service Coverage Ratio is the cash flow available to pay current debt obligations.
 Leverage-Funds borrowed funds to purchase an asset in the hopes that the income of capital gain
would surpass the cost of borrowing.
 Project Report- it is a document that describes the projects, objectives challenges, and progress.
 Contingency-A future event or circumstance which is possible but cannot be predicted with certainty.
 Project Sponsor-An individual or a group that provides financial and other resources and support the
project.
 Capital Intensive-It is the acquisition of physical assets by the company for the use of further its long-
term business goals and objectives.

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, also known as non-recourse loan, is a type of financing in which the lender's claim is
limited to the collateral or specific assets of the project being financed. In the event of default, the lender's
recourse is restricted to the project's assets and cash flows, and they cannot pursue the borrower's other assets
or personal guarantees.
In non-recourse financing, the lender bears a higher level of risk compared to traditional recourse financing,
where the borrower is personally liable for repayment. Non-recourse debt is commonly used in project
finance, where the project's assets and cash flows serve as the primary source of repayment. This structure
helps protect the borrower or project sponsor from personal liability and limits their risk exposure.

Mezzanine finance, also known as mezzanine debt or mezzanine capital, is a hybrid form of financing that
combines elements of debt and equity. It sits between senior debt (traditional bank loans) and equity in the
capital structure of a company or project. Mezzanine finance is typically used to fill the funding gap between
the equity provided by the project sponsor and the senior debt provided by traditional lenders.

Here's an example to illustrate mezzanine finance:

Let's consider a company planning to build a large-scale infrastructure project, such as a toll road. The total
project cost is estimated to be $100 million. The project sponsor has managed to secure $70 million in equity
from investors but needs an additional $30 million to fully fund the project.

The project sponsor approaches a mezzanine financing provider, such as a private equity firm or specialized
mezzanine fund, for the remaining $30 million. The mezzanine lender offers a mezzanine loan, which has
characteristics of both debt and equity.
500 Words (Max.)

500 Words (Max.)

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

Task Q4 Solution:
Project financing is often used in large-scale infrastructure, energy, and industrial projects. These industries
have unique qualities that make them suited for project financing. Here are a few of the reasons why project
finance is frequently used in various industries:

High capital intensity: Projects in infrastructure (e.g., toll roads, airports, ports), energy (e.g., power plants,
renewable energy projects), and industrial (e.g., mining, manufacturing facilities) frequently demand
significant upfront investments. Project financing enables the mobilisation of large sums of funds to fund
these capital-intensive enterprises.

Extended Project Lifecycles: Projects in sectors such as infrastructure and energy can have extended
lifecycles that span many decades. Project finance fits perfectly with these long-term projects since it
provides financing that corresponds to the project's schedule, allowing for payback over time.

Certain industries, such as infrastructure and energy, generate very stable and predictable cash flows over the
course of a project's existence. Toll road projects, for example, produce cash from toll collections, whereas
power plants earn revenue via long-term power purchase agreements. These predictable income flows offer
lenders and investors with a dependable source of repayment, making project finance an appealing choice.

Tangible Assets: Projects financed through project financing frequently entail valuable tangible assets such as
buildings, plants, equipment, or infrastructure. These assets can be used as collateral for lending, providing
lenders with security in the event of a default.

Risk Ring-Fencing: Project finance provides for the isolation of project risks from the broader business
structure. This risk ring-fencing protects lenders and investors by restricting their exposure to the project and
its assets. It also clarifies the risk allocation among project parties.

Specific Revenue Streams: Many projects finance-eligible projects include dedicated revenue streams
connected to the project's production or services. Infrastructure projects, for example, may produce cash
through user fees, whereas energy projects may have long-term contracts for power sales. These distinct
revenue streams give lenders and investors with visibility and assurance about the project's potential to
produce cash flows for debt repayment.

Independent Project Entity: Project financing frequently entails the formation of a Special Purpose Vehicle
(SPV) or project firm that is completely dedicated to the project. This independent corporation assists in
isolating the project's financial performance, assets, and obligations from the balance sheet of the sponsor or
parent firm. This separation reduces risks linked with the sponsor's other operations while also providing
financial transparency for the project.

Political and regulatory risks: Projects in infrastructure and energy face political, regulatory, and
environmental hazards. By implementing risk allocation procedures, contracts, and government assistance
agreements, project finance can help alleviate these risks.

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Smart Task Submission Format

500 Words (Max.)

Please add / delete blocks if needed.

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