L2

Question 1

What is impact investing

Answer 1

Idea that investors have return objectives but have capital that has purpose and it matters

purpose and return driven capital in the industry

governments and foundations with the idea of catalytic capital

there are certain regions or part of the company lifecycle where investors are best placed to take on risks

Question 2

Can you speak to the history of clean tech investments?

Answer 2

Since 2012 technology costs have reduced, change in conviction and attitude towards the social and economic impact of climate change

cleantech returns have disappointed for several years but falling costs for cleantech and decreased competition for deals have turned this around

poor until 2013 due to …
-poor regulatory framework - governments were not subsidising research and high uncertainty
-Spain supported then changed mind - large losses for investors
- first capital investment is expensive
- micro condition flight to safety
- unproven processes
- uncertainty in valuation of firms and business models
-global financial crisis
- valley of death - early stage long way to get to profitability

now
- consensus achieved of problems that need addressing
- supportive regulatory framework eg. IRA in US
- wind and solar have achieved price parity
- long duration storage technologies
- Tesla - high returns and esg landscape

Question 3

Where has money been made and lost in clean tech subsectors?

Answer 3

IRR high in renewable power deployment, energy optimization tech and resource subsittions

money lost in renewable power manufacturing

Question 4

Where has the money been invested into clean tech subsectors

Answer 4

Mainly renewable power deployment and resource solutions

high (~8bn dollars) in renewable power manufacturing despite loses

Question 5

What is an investment? How should investment types be organised?

Answer 5

= exchange of money for a claim of benefits to be generated by some assets

real and financial assets
Real assets - eg. steel structures, land and heavy machinery - foundations upon which economic activity is built

Finanical assets = less tnagible - have no physical properties - constitute an agreement between parties eg. equity derivated

Question 6

What are the different kinds of asset classes?

Answer 6

1. Equities = shares in a plc. company
2. Fixed income = lend directly to clean energy projects
3. Real estate = ownership in manufacturing or producing facilities
4. Commodities = speculate on the price of outputs like electricity
5. Derivates

RE is not a class but a sub-category of these asset classes

Question 7

Who is an investors? How can investors be categorised?

Answer 7

any person or entitiy who commits capital with the expectation of receiving financial returns

strategic - already a presence in the sector eg. oil and gas going into renewables
= already have operational teams, boots on the ground

financial - pre funds or vs or institutions like pensions funds

Question 8

What is the risk profile likely to be for a utility company?

Answer 8

Have the opperational capacity - can take risks at an earlier stage
higher risk when you look at an investment but get a much higher return and have the skill set to manage that risk - compared to a fund with no operational capacity

Question 9

Can you speak to a debt?
- instruments
-buyers
-priority
-repayment
-control

Answer 9

Instruments
- assets that require a fixed payment to the holder usually with interest

Buyers
- lenders that recoup their investment in the form of interest and then principal paid by the company on the debt

Priority
- priority in liquidation some times even secured a specific asset

Repayment
- fixed repayment and reutnr - upside is capped
- sometimes can be repaid without cost
- classified as a fixed cash flow

Control
- can exercise passive negative control

Question 10

Can you speak to equity?
- Insturments
- buyers
- priority
- control

Answer 10

Instruments
- common stocks are securities that are a claim on the earnings of an assets of a corporation

Buyers
- become shareholders in that company. Can recover their investment when the company’s value increases - their shares rise in values - or when a company pays a dividend
- more volatile

Priority
- lower in the pecking order - pre and post liquidation
-upside is uncapped

Control
- exercise control and direction over the company

Question 11

How are risks and returns correlated in capital structure?

Answer 11

highest risk = higher returns
low priority of payment = highest share of profits/losses

lowest risk = lowest returns
highest priority of payment = lowest share of profits and losses

Question 12

What is highest to lowest on risk and returns in a capital structure

Answer 12

Highest —> lowest
Equity
Hybrid debt/equity
subordinated debt
senior debt/bonds

Question 13

What does a discounted cashflow valuation relate to?

Answer 13

value of an asset to the present value of expected future cashflows on that asset

Question 14

What is a relative vlaution?

Answer 14

estimates the value of an asset by looking at hte pricing of comparable assets relative to a common variable like earnings, cashflows, book value or sales

Question 15

What is a contingent claim valuation?

Answer 15

uses option pricing models to measure the value of assets that share option characteristics

if don’t have a measure of profitability

Question 16

What is the assumption around assets in a DCF?

Answer 16

every asset is assumed to have an intrinsic value that can be estimated, base dupon its characteristic in terms of cash flows, growth and risk

Question 17

What info is required to have a DCF valuation?

Answer 17

need to estimate:
the life of an asset
the cash flows during the life of the asset
the discount rate to apply to these cash flows q

Question 18

What are the two most common analytical techniques used in estimating an investment?

Answer 18

NPV and IRR

Question 19

What are the conceptual foundations behind NPV and IRR?

Answer 19

time value of money and the opportunity cost of capital

Question 20

What is the NPV rule

Answer 20

If NPV>0 accept investment in the project

if capital is constrained the rule is to prioritse according to the amount of NPV generated

Question 21

What is the NPV equation?

Answer 21

NPV = Investment - Sum of number of year Cn/1+r^n

Question 22

What is the Value Improvement Ratio?

Answer 22

complimentary to the NPV measure of value creation
can’t be used in isolation but v helpful in ranking the attractiveness of competing investment projects

VIR = capital employed/NPV

Question 23

How do you approximate the oppertunity cost of capital?

Answer 23

This is the best available expected reutnr offered in the market on an investment of comparable risk and term of cash flow being discounted

use a WACC

Question 24

What is the CAPM equation?

Answer 24

re = riskfree asset + beta x (rmarket - rfree)

Question 25

What is the WACC equation?

Answer 25

D/D+E x rd * (1-t) + E/D+E x re

where D+E are capital structures evaluated at market value based on target cap structure

t is the marginal tax rate

rd is the cost of debt
re is the required rate of return on equity

Question 26

Why do we use the WACC?

Answer 26

• measures the returns demanded by all providers of capital - investments must offer this return to be worth using the capital providers money
• represents the opportunity cost of capital employed - the rate of return investors could earn elsewhere on projects with the same risk and capital structure
• represents the true discount rate for the project, after accounting for capital structure and risk

Question 27

What is the difference between corporate and project WACC?

Answer 27

Corporate is not necessarily the cost of capital for a project within a firm
- the systematic risk of the project could differ from the average systematic risk of the firms projects
- the target capital structure for the project - a company within a firm - could differ from the corporate target capital structure

• each project will have its own wacc and unique hurdle rate

Question 28

What is the relationship with debt to WACC?

Answer 28

increaseing debt lowes the wacc
but there is a risk of insolvency

debt can make the equity more attractive and make your project a positive NPV

Question 29

What are the three approaches to international equity risk premiums?

Answer 29

1. Assume that every company in the country is equally exposed to country risk
   E(Return) = Riskfree Rate + Country ERP + beta (US Premium)
2. Assume that a companies exposure to a country risk is similar to its exposure to other market risk
   E(Return) = Riskfree rate + beta (US Premum + Country ERP)
3. Treat country risk as a separate risk factor and allow firms to have different exposures to country risk - perhaps based upon the proportion of their revenues come from non-domestic sales
   E(return) = risk-free rate + b(US premium) + I (country (ERP)
   country erp: additional country equity risk premium

Question 30

What is an IRR?

Answer 30

IRR is the r term in the NPV formula, which can be evaluated independently from NPV

it is a yield indicator = an annualised rate that is analogous to common forms of investment

Investment - sum Cn/1+r)^n= 0

irr is the discount rate that get NPV to equal 0

Question 31

What is the IRR rule?

Answer 31

accept an investment in a project when the IRR>WACC

if Project IRR> Project WACC then Project NPV>0

minimum IRR will be higher for riskier projects, that for safer projects

Question 32

What is the hurdel rate a sum of?

Answer 32

Hurdle rate = riskless rate + risk premium

Question 33

What is the issue with having a single hudrle rate for a whole firm?

Answer 33

can lead to errors in capital allocation

Question 34

How do you calculate the payback period?

Answer 34

total invesment/cash inflow (net profit)