Corporate Finance: Long-Term Sources, Project Appraisal and Treasury Management — Practice

Question 1

Name two hybrid instruments that sit between pure equity and pure debt.

Accepted Answer

Convertible debentures and zero-coupon bonds (among other possible hybrid structures).

Question 2

What does 'SPV' stand for in a project finance structure, and what is its role?

Accepted Answer

Special Purpose Vehicle — a dedicated entity created solely to own and operate the specific project being financed.

Question 3

Give one example each of a fund-based and a non-fund-based working capital facility.

Accepted Answer

Fund-based: cash credit (or overdraft, or bill discounting). Non-fund-based: bank guarantee (or letter of credit).

Question 4

A project's cash flow available for debt service is Rs. 60 crore, and its debt service obligation for the period is Rs. 40 crore. Compute the DSCR and briefly interpret it.

Accepted Answer

DSCR = 60/40 = 1.5. This indicates the project generates 1.5 times the cash flow needed to cover its debt service obligation for the period — generally viewed as a comfortable coverage level, subject to project-specific and lender-specific benchmarks.

Question 5

Name a corporate treasury's three core responsibilities.

Accepted Answer

Liquidity management (ensuring cash is available to meet obligations), funding (sourcing capital at the lowest sustainable cost), and risk management (identifying and managing financial risks from operations and financing).

Question 6

Explain the core policy rationale behind the Tandon Committee's MPBF approach to working capital lending.

Accepted Answer

Rather than lending purely against available security, MPBF assesses the borrower's genuine, projected working capital need (based on current assets and liabilities, adjusted by a prescribed margin), specifically to discourage a company from relying excessively on bank credit to fund working capital that should properly be financed through the company's own long-term sources.

Question 7

Explain the difference between non-recourse and limited-recourse project financing, and why lenders might accept a limited-recourse structure rather than insisting on full recourse to the promoter.

Accepted Answer

Non-recourse financing gives lenders no claim at all on the promoter's other assets if the project fails — their claim is strictly limited to the project's own assets and cash flows. Limited-recourse financing gives lenders some additional, specifically negotiated claim beyond the project itself — such as a completion guarantee from the promoter during the construction phase — without extending to full recourse against the promoter's entire balance sheet. Lenders might accept a limited-recourse structure because the project's own cash-flow profile and risk mitigants (offtake agreements, government support, insurance) may be assessed as sufficiently strong to support the debt on a largely project-contained basis, while a targeted, limited promoter guarantee (such as during the highest-risk construction period) addresses the specific residual risk lenders are unwilling to bear purely on the project's own merits.

Question 8

A company has floating-rate rupee borrowings and also has foreign-currency export receivables due in three months. Identify the two distinct treasury risk categories involved and one instrument the treasury could use to manage each.

Accepted Answer

The floating-rate rupee borrowing exposes the company to interest rate risk, manageable through an interest rate swap (exchanging floating-rate for fixed-rate interest obligations) or other interest rate derivatives. The foreign-currency export receivable exposes the company to foreign exchange risk, manageable through a forward contract locking in the exchange rate for the expected receivable at the future payment date. These are two distinct risk categories requiring two different risk-management instruments, even though both arise from the same company's overall financial position.

Practice — Corporate Finance: Long-Term Sources, Project Appraisal and Treasury Management

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