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Vce Smart Task 1 Project Finance
Vce Smart Task 1 Project Finance
Task Q1: What is Finance? How Finance is different from Accounting? What are
important basic
points that should be learned to pursue a career in finance?
Task Q1 Solution :
It is the management and control of assets and investments, which focuses on the
decisions of
individual, financial and other institutions as they choose securities for their
investments portfolios.
Also, managerial finance involves the actual management of the firm, as well as
profiling and managing
project risks.
2. Finance is a broader term for the management of assets and liabilities and the
planning of future
growth, whereas accounting focuses on day-to-day flow of money in and out of a
company and
institution,
3. The aim of finance includes decision making, strategy, managing & controlling.
The aim of
accounting is to collect and present the financial information for both
internal and external purpose.
Within finance, one can find a variety of job roles that are not limited to just
the accounting field.
You can explore financial career options in various industries such as financial
service, financial
planning, fund management, regulatory compliance, trading, financial management,
and so on.
The important basic points to be learned to pursue a career in finance are as
follows-
Task Q2: What is project finance? How is project finance different from corporate
finance? Why
can’t we put project finance under corporate finance?
Task Q2 Solution :
Task Q3 Solution :
1. Project sponsor- Whole idea of project comes from them; they are the investor
of money into the
project who may be an existing company, a developer, or a government
institution or agency.
6. Repayment schedule- It sets out how the principal debt will be repaid – on
either a “Straight
Line” or a “balloon” basis (when it is repaid at the end of the project).
9. Financing agreements- The documents which provide the project financing and
sponsor support
for the project as defined in the project contracts.
15. Contingency- An additional amount or percentage to any cash flow item needed
to provide a
cushion.
19. Debt service coverage ratio-this is usually a historical test which compares
the amount by which
the net cash flow for a given period, usually 12 months, has gone over the
debt service requirement
(principal amount plus interest).
20. Operating risk- Cost, technology, and management components which impact
opex and project
output/throughput. Costs include inflation.
Task Q4: What are non-recourse debt / loan? What is mezzanine finance explained
with an example.
Task Q4 Solution :
Mezzanine debt gets its name because it blurs the line between what constitutes
debt and equity.
It is highest risk form of debt, but it offers some of the highest returns- a
typical rate is in the range of 12%
to 20% per year. A mezzanine lender is generally brought into a buy out to display
some of the capital that
would as it usually be invested by an equity investor.
Mezzanine loans are a hybrid of both debt and equity. Depending on the terms of the
agreement and how
events unfold, the arrangement can provide an equity interest to lenders.
Mezzanine lenders usually work with companies that have a successful track record.
For example, you
might use a mezzanine loan to acquire an existing business or expand operations for
a business that’s
already profitable.
In short,
Mezzanine funds can be used for buying a company or for expanding 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 the 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 the 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. As we see from above, Federal Capital Partners (a Private Equity
firm) has provided
$6.5 million in the mezzanine fund to The Altman Companies for the development of
Altis Grand Central.
500 Words (Max)
Task Q5: Explain in detail with reasons of what the sectors are or which types of
projects are suitable for
project finance?
Task Q5 Solution :
The types of project for which project finance is suitable for are-