Unit 3 - Corporate Finance vs PF

Question 1

What are the different factors that differentiate Corporate Finance from Project Finance? (10)

Answer 1

• Finance Vehicle
• Type of capital
• Dividend policy and reinvestment decisions
• Capital investment decisions
• Financial structures
• Transaction cost for financing
• Size of financings
• Basis for credit evaluation
• Cost of capital
• Investor / lender base

Question 2

Advantages of Project Finance (8)

Answer 2

• Raise larger amounts of long-term, foreign equity & debt capital
• Protect the sponsor balance sheet (does not increase WACC)
• Undertake a project with more risk than underwrite independently
• Strong discipline to contracting
• Tough scrutiny on capital investment decision
• De facto political insurance
• Finite life & fixed dividend policy
• Investors rather that managers make decisions

Question 3

Disadvantages of Project Finance (6)

Answer 3

• Complex
• Significant lead times
• High transaction cost
• High cash flow requirements
• Elevated coverage ratios
• Intrusive supervision of contracts

Question 4

Corporate Finance vs Project Finance: Finance Vehicle

Answer 4

CF: Multi-Purpose Org
PF: Single-Purpose Entity

Question 5

Corporate Finance vs Project Finance: Type of Capital

Answer 5

CF: Permanent (indefinite time horizon)
PF: Finite (horizon matches life of project)

Question 6

Corporate Finance vs Project Finance: Dividend Policy and reinvestment decisions

Answer 6

CF: Management makes decisions autonomous from investors and creditors
PF: Fixed Dividend Policy (immediate payout; no reinvestment)

Question 7

Corporate Finance vs Project Finance: Capital Investment decisions

Answer 7

CF: Opaque to creditors
PF: Highly Transparent to Creditors

Question 8

Corporate Finance vs Project Finance: Financial Structures

Answer 8

CF: Easily duplicated; common forms
PF: Highly-tailored structures (not easily reused)

Question 9

Corporate Finance vs Project Finance: Transaction cost for financing

Answer 9

CF: Low cost (competition from providers) & short turnaround time
PF: Higher cost (documentation & longer gestation)

Question 10

Corporate Finance vs Project Finance: Size of financings

Answer 10

CF: Flexible
PF: Require critical mass to cover high transaction cost

Question 11

Corporate Finance vs Project Finance: Basis for credit evaluation

Answer 11

CF: Overall financial health (focus on balance sheet & cashflow)
PF: Technical economic feasibility - focus on project’s assets, cash flow and contractual agreements

Question 12

Corporate Finance vs Project Finance: Cost of Capital

Answer 12

CF: Relatively Lower
PF: Relatively Higher

Question 13

Corporate Finance vs Project Finance: Investor / Lender Base

Answer 13

CF: Broader participation, deep secondary markets
PF: Smaller Group, limited secondary markets