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1. Question 1:
What are the factors influencing Investment Vehicle (SPV) decisions while structuring project funding.
A SPV in a structured product transaction is a limited liability company, a trust, limited liability
partnership or other form of body corporate based on the provisions of the local corporate, taxation
and bankruptcy law. In general, the SPV has no credit standing by itself. Its credit standing derives
from the assets held and the various contractual clauses securing the notes issued to investors and
rated by agencies when sold in the market.
The purpose of the SPV is to manage risk, cost of capital and control structure.
Investors in securitised instruments take a direct exposure on the performance of the underlying
collateral and have limited or no recourse to the originator. Hence, they seek additional comfort in the
form of credit enhancement.
The credit enhancements are often essential to secure a high level of credit rating and for low cost
funding. By shifting the credit risk from a less-known borrower to a well-known, strong, and larger
credit enhancer, credit enhancements correct the imbalance of information between the lender(s) and
the borrowers
External Credit Enhancements They include insurance, third party guarantee and letter of credit
Internal Credit Enhancements Such form of credit enhancement comprise the following
Credit Trenching (Senior/Subordinate Structure) The SPV issues two (or more) tranches of securities
and establishes a predetermined priority in their servicing, whereby first losses are borne by the
holders of the subordinate tranches (at times the originator itself). Apart from providing comfort to
holders of senior debt, credit tranching also permits targeting investors with specific risk-return
preferences. Over-collateralisation The originator sets aside assets in excess of the collateral required
to be assigned to the SPV. The cash flows from these assets must first meet any overdue payments in
the main pool, before they can be routed back to the originator. Cash Collateral This works in much
the same way as the over-collateralisation. But since the quality of cash is self-evidently higher and
more stable than the quality of assets yet to be turned into cash, the quantum of cash required to meet
the desired rating would be lower than asset over-collateral to that extent. Spread Account The
difference between the yield on the assets and the yield to the investors from the securities is called
excess spread. In its simplest form, a spread account traps the excess spread (net of all running costs
of securitisation) within the SPV up to a specified amount sufficient to satisfy a given rating or credit
equity requirement. Only realisations in excess of this specified amount are routed back to the
originator. This amount is returned to the originator after the payment of principal and interest to the
investors. Triggered Amortisation This works only in structures that permit substitution (for example,
rapidly revolving assets such as credit cards). When certain preset levels of collateral performance are
breached, all further collections are applied to repay the funding. Once amortisation is triggered,
Question 2:

2. Discuss the relevance and methodology to compare "Share holder value creation.
It is nothing but the value that is delivered by an entity to its existing equity holders. Maximizing the
shareholders’ value is one of the key objectives for any organization. It highly depends on the ability of its
management to make appropriate decisions and the way these decisions are implemented for driving in more
sales and leveraging the profits earned by the same. Higher the profits earned, higher shall be the dividends
offered to the equity holders.
A company must always prioritize the interests of its shareholders and must take every possible measure for
shareholders’ value creation. There are various principles that a company must necessarily follow for
shareholder’s value creation. The first principle that a company must abide by is that it must not manage its
earnings or, in other words, it must not participate in the earnings expectations game.
This is high because of the fact that if a company focuses too much on maximizing its earnings, it tends to
compromise the value, and this can even destroy its ability to make operating decisions. The company must
take strategic decisions that can help the same in maximizing the expected value, even if it comes at the cost of
slight losses or a lowered rate of earnings in the nearing time. The company must make acquisitions that can
help it by maximizing the expected value. The company must move forward with assets that add value to the
business.

3. How to Maximize Shareholders Value?
The measure of an organization’s success can be learned to the extent it goes for maximizing its shareholder’s
value. The management of an organization should primarily focus on the interests of its shareholders while
making necessary management decisions. There are seven drivers through which a company can maximize its
shareholder value. These drivers are revenue, cash tax rate, operating margin, cost of capital, investment in WC
(working capital), incremental CE (capital expenditure), and competitive advantage period. The organization
must not just provide a focus on profit maximization. Short-term profit maximization is short-lived.
3 ways –

4. 1. Economic value added approach
It is a concept based on economic profit and not accounting profit. In EVA approach, the comparison is between
ROCE and COCE. It is the ratio of the net operating profit less adjusted tax (NOPLAT) to capital employed (CE).
NOPLAT is profit after depreciation and taxes but before interest.
NOPLAT = PBIT (I-T) = PAT + INT (I-T)
Return on capital employed = PBIT – I CE
Economic value is added when ROCE > WACOC
Economic value is destroyed when ROCE < WACOC
EVA = net operating profit after tax – cost charges of capital employed
It is the net earnings in excess of the cost of capital supplied by lenders and share holders. It represents the
excess return to shareholders over and above the minimum required return. It is net value added to
shareholders.
2. DCF-
The true economic (present) value of a firm, or a project or a strategy depends on the cash flows and the
appropriate discount rate (adjusted if required).
Economic value =PV of net operating cash flows + PV of terminal value
Value creation strategies
• Revenue enhancement
• Cost reduction
• Optimal Asset utilisation
Cost of capital reduction
3.Market-to-book value per share approach (MV/ BV)
The Market to Book Ratio (also called the Price to Book Ratio), is a financial valuation metric used to evaluate a
company’s current market value relative to its book value. The market value is the current stock price of all

5. outstanding shares (i.e. the price that the market believes the company is worth). The book value is the amount
that would be left if the company liquidated all of its assets and repaid all of its liabilities.
Interpreting the Ratio
A low ratio (less than 1) could indicate that the stock is undervalued (i.e. a bad investment), and a higher ratio
(greater than 1) could mean the stock is overvalued (i.e. it has performed well). Many argue the opposite and
due to the discrepancy of opinions, the use of other stock valuation methods either in addition to or instead of
the Price to Book ratio could be beneficial for a company.
A low ratio could also indicate that there is something wrong with the company. This ratio can also give the
impression that you are paying too much for what would be left if the company went bankrupt.
The market-to-book ratio helps a company determine whether or not its asset value is comparable to the
market price of its stock. It is best to compare Market to Book ratios between companies within the same
industry.
RELEVANCE OF SHAREHOLDER VALUE CREATION
Private sector / Funds allowed in banking and mutual funds in addition to FII’s are allowed to invest in
Indian debt and equity.
Indian corporates allowed to raise funds offshore
Greater freedom to financial intermediaries.
Capital issue controls abolished.
3): What are the steps in corporate investment structuring.
3): What are the steps in corporate investment structuring.
Step 1: Analyzing the Present Scenario

6. Planning for the future requires having a clear understanding of the company's current situation in relation
to where they want to be. That requires a thorough assessment of the company's financial statements i.e.
Balance sheet, Profit and loss statement , cash flow statements. Goals need to be clearly defined and
quantified so that the assessment can identify any gaps between the current investment strategy and the
stated goals. This step needs to include a frank discussion about the company’s current financial status,
future goals in order to set the course for developing an investment strategy.
Step 2: Establish Investment Objectives
One needs to plan the investment objectives by studying the risk-return profile of the company.The ability
to determine how much risk a company is willing and able to take, as well as how much volatility it can
sustain, is critical to developing an investment plan that can generate the desired returns while posing a
manageable degree of risk. Benchmarks for tracking the portfolio's performance can be constructed once
an acceptable risk-return profile has been established.
Step 3: Determine Asset Allocation
Using the risk-return profile, the company can develop an asset allocation strategy. Selecting from various
asset classes and investment options, the investor can allocate assets in a way that achieves optimum
diversification while targeting the expected returns. The investor can also assign percentages to various
asset classes, including stocks, bonds, cash, and alternative investments, based on an acceptable range
of volatility for the portfolio. The asset allocation strategy is based on a snapshot of the company’s current
situation and goals and is usually adjusted as life changes occur.
There are three main ways for this :
Equity : With equity investment, the company will have ownership stake in th business. Determining what
ownership stakes are worth largely depends on the financial projections, balance sheet, assets and larger
macroeconomic trends. Egs for equity investment options: SBIC, Angel investors, Venture capitalists, equity
crowdfunding.
Debt investment is considered less risky for the investor. If your venture fails, debt investors recoup their
investment before equity investors. However, debt investors also have no ownership stake, meaning if your
business is wildly successful, they won’t see the same escalating profits that an equity investor will.
Convertible debt, the third option, is a combination of debt and equity investment in which the company
borrows money from investors with the understanding that the loan would be repaid or converted into a
share of ownership at a later date. This conversion usually occurs after a second round of funding or when
the firm has reached a particular valuation.
Structuring of Investment
1. Hold Co vs New Co

7. Whether or not should the new investment be made in an existing company or a new company which is the
subsidiary of the main company (holding company). Few points to consider are:
Advantages of a Holding Company
● Liability Protection: The liability of the subsidiary company is limited to the extent of money that they
have invested in the business. This means that is the profits of a company have been moved to the holding
company, they are out of reach for the creditors.
● The holding company structure allows the parent company to lend back the same money that was
received as profits. The money can be lent out in the form of a secured loan.
● Tax Benefits: The strategy is used to transfer the maximum amount of earnings to the holding company
in the form of dividends. Multinational companies are known for using the holding company structure to
build a competitive advantage in the form of sustained low income tax payments.
Disadvantages of a Holding Company
● High Cost of Regulation: Usually the holding company structure is used by multinational companies or
other companies which have a huge asset base. As a result, the regulations and compliance norms related
to holding companies tend to be fairly detailed.
● Anti-Trust Laws: Holding companies have been used to create invisible monopolies in the past. As a
result, regulators regularly keep a check on these companies to ensure that they are not creating a
monopoly.
2. Ownership structure:
A business does not just vary in size and industry but also in its ownership. This means that some
businesses are owned by a single person, group of people, corporations, charitable foundations, or trusts.
In fact, some businesses are also owned by the state. Basically, different ownership structure types overlap
the different legal forms that a business can take
There are basically three levels of ownership in a share ownership structure. These are parents, affiliates,
and subsidiaries. Here, parent companies own the subsidiaries. The amount of ownership interest can range
from a fraction to even a complete 100%. Additionally, an affiliate is a sibling legal entity.
4): What are the factors influencing capital structure of a company.
The capital structure of a firm is the mix of different securities used to finance the assets of the firm.
The two broad classes of securities being Debt and Equity.

8. Optimal Capital Structure is the one at which the cost of capital (WACOC) is minimum and the
Enterprise value is maximum. From a corporate perspective, equity represents a more expensive,
permanent source of capital with greater financial flexibility.
Factors effecting capital structure are-
· Cost of capital
The cost of raising funds depends on the expected rate of return for the suppliers. This rate depends
on the risk borne by investors. Ordinary shareholders face the maximum risk as they don’t get a
fixed rate of dividend. They get paid after preference shareholders receive their dividends. The
company has to pay interest on debentures under all circumstances. It attracts more investors to
opt for debentures and bonds.
· Impact of Lower D:E in the later period should actually push up the Cost of Capital.
The word ‘equity’ denotes the ownership of the company. Trading on equity means taking advantage
of equity share capital to borrowed funds on reasonable basis. It refers to the additional profits that
equity shares earn because of funds raised by issuing other forms of securities, viz., preference
shares and debentures.
It is based on the premise that if the rate of interest on borrowed capital and the rate of dividend on
preference capital are lower than the general rate of company’s earnings, the equity shareholders
will get advantage in the form of additional profits. Thus, by adopting a judicious mix of long-term
loans (debentures) and preference shares with equity shares, return on equity shares can be
maximized.
· Free cash flow availability
Debentures and preference shares are often redeemable, i.e., they are to be paid back after their
maturity. The expected cash flows over the years must be sufficient to meet the interest liability on
debentures every year and also to return the maturity amount at the end of the term of debentures.
Thus, debentures are not suitable for those companies which are likely to have irregular cash flows
in future
· Management control
A management that wants outside interference in its operations may not raise funds through equity
shares. Equity shareholders have the right to appoint directors, and they also dilute the stake of
owners in the company. Some companies may prefer debt instruments to raise funds. If the creditors
get their instalments on loans and interest on time, they will not be able to interfere in the workings
of the business. But if the company defaults on their credit, the creditors can remove the present
management and take control of the business.

9. · Flexibility
A good financial structure should be flexible enough to have scope for expansion or contraction of
capitalisation whenever the need arises. In order to bring flexibility, those securities should be issued
which can be paid off after a number of years.
Equity shares cannot be paid off during the life time of a company. But redeemable preference
shares and debentures can be paid off whenever the company feels necessary. They provide
elasticity in the financial plan.
· Investor preferences in instrument structuring
The government’s monetary policies in terms of taxation on debt and equity instruments are also
crucial. If a government levies more tax on gains from investing in the share market, investors may
move out of equities. Similarly, if the interest rate on bonds and other long-term instruments is
affected due to the government’s policy, it will also influence companies’ decisions.
· Risk loading due to higher DOL
It is needless to say that if we want to examine the effect of leverage, we are to analyse the
relationship between the EBIT (Earnings before interest and Tax) and EPS (earnings per share).
Practically, it requires the comparison of various alternative methods of financing under various
alternative assumptions relating to Earning Before Interest and Taxes.
Financial leverage or trading on equity arises when fixed assets are financed from debt capital,
(including preference shares). When the same gives a return which is greater than the cost of debt
capital, the excess will increase the EPS (Earnings per share) and the same is also applicable in
case of preference share capital.
Conclusion- The proportion of debt and equity funds in a company is dependent on both internal
and external forces. Businesses need to keep this in mind while deciding on the ratio of debt and
equity instruments within their capital structure.
5):
a) Non resource financing of infrastructure Projects.
b) BOOT Structure - explain with an example the Merits & Demerits.

10. 6): Write Short notes on any three.
a) Buy back of equity.
b) Holding company / operating company structures.
c) Factors influencing long term interest rates.
d) Colateral Securities.
e) Optimal capital structure.
5. a) Non resource financing of infrastructure Projects.
Non-recourse finance is a type of commercial lending that entitles the lender to repayment
only from the profits of the project the loan is funding and not from any other assets of the
borrower. Such loans are generally secured by collateral.
A non-recourse loan, more broadly, is any consumer or commercial debt that is secured
only by collateral. In case of default, the lender may not seize any assets of the borrower
beyond the collateral. A mortgage loan is typically a non-recourse loan.
Understanding Non-Recourse Finance

11. Non-recourse financing is a branch of commercial lending that is characterized by high
capital expenditures, distant repayment prospects, and uncertain returns.
In fact, it is similar in its character and risks to venture capital financing. For example, say a
company wants to build a new factory. The borrower presents a bank with a detailed plan
for the construction, and with a business plan for the greatly-expanded production that it will
enable the company to undertake. Repayment can be made only when the factory is up and
running, and only with the profits of that production.
The lender is agreeing to terms that do not include access to any of the borrowers' assets
beyond the agreed upon collateral, even if they default on the loans. Payments will only be
made when and if the funded projects generate revenue. If a project produces no revenue,
the lender receives no payment on the debt. Once the collateral is seized, the bank cannot
go after the borrowers in hopes of recouping any remaining losses.
Q5 (b) BOOT Structure - explain with an example the Merits & Demerits.
BOOT (build, own, operate, transfer) is a public-private partnership (PPP) project model in
which a private organization conducts a large development project under contract to a
public-sector partner, such as a government agency. A BOOT project is often seen as a
way to develop a large public infrastructure project with private funding.
BOOT model working mechanism:
The public-sector partner contracts with a private developer - typically a large corporation
or consortium of businesses with specific expertise - to design and implement a large
project. The public-sector partner may provide limited funding or some other benefit (such
as tax exempt status) but the private-sector partner assumes the risks associated with

12. planning, constructing, operating and maintaining the project for a specified time period.
During that time, the developer charges customers who use the infrastructure that's been
built to realize a profit. At the end of the specified period, the private-sector partner transfers
ownership to the funding organization, either freely or for an amount stipulated in the original
contract. Such contracts are typically long-term and may extend to 40 or more years.
Merits of BOOT
● It minimizes the public cost for infrastructure development.
● It reduces public debt.
● it allows innovation.
● It provides a chance to bring in expertise.
● It allows each party to focus on their strengths.
● It keeps public-sector funds where they are most needed.
● It is a process that is fully appraised.
Demerits of BOOT model:
● It can have higher transaction costs.
● It only works for large projects.
● It requires fund-raising to be successful.
● t may require substantial operational revenues to be successful.
● It requires strong corporate governance.
● It can place the public sector at a disadvantage.
Successful example of BOOT model is the Chennai Wastewater Treatment Project in Alandur, India