ASSIGNMENT 2

IFM
TAJU ABDULAZIZ
19MCL021

MAY 2020

Guided by

KUSUM JAIN
QUESTION #1

 FROM THE PROJECT PRESENTATION DONE IN ASSIGNMENT 1;

a. What is an active investor? Give examples. List the active investors of your project.
b. Why an infrastructure company prefers higher debt than equity?
c. Senior debt amount – and source of senior debt.
 ANSWER Q#1
ASSIGNMENT 2

A. WHAT IS AN ACTIVE INVESTOR?

• There are three types of investors:
– Pre-investor,
– Passive investor, and
– Active investor.
ACTIVE INVESTOR
• Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor.
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• Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.
• Active investing requires confidence that whoever is investing the portfolio will know exactly the right time to buy
or sell.
• Successful active investment management requires being right more often than wrong.
• Active investors build on the foundation of the passive investor. They take the process to the next level by running
their wealth like a business.
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 ANSWER…
ASSIGNMENT 2

• Active investors work just as hard at making their money work for them as they ever did
earning it in the first place. In other words, active investing is more work, and that's why it is
not for everyone.
• Real estate is an active investors dream because of vast inefficiencies in price, usage, and
management.
• EXAMPLE: Real estate investor who buys mis-priced homes  and sells it by adding value with
a few minor improvements, such as adding a few windows, remodeling the kitchen, etc.
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• Active investors in the ETHIO-DJIBOUTI RAILWAY LINE MODERNIZATION PROJECT

are;
– China Railways Group Ltd
– China Civil Engineering Construction Corp (CCEC)
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 ANSWER…
ASSIGNMENT 2

B. WHY AN INFRASTRUCTURE COMPANY PREFERS HIGHER DEBT THAN EQUITY?

• Because the lender does not have a claim to equity in the business, debt does not dilute the owner's ownership
interest in the company.
• A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim
on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than
they would if they had sold stock in the company to investors in order to finance the growth.
• Except in the case of variable rate loans, principal and interest obligations are known amounts which can be
forecasted and planned for.
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• Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the
company.
• Raising debt capital is less complicated because the company is not required to comply with state and federal
securities laws and regulations.
• The company is not required to send periodic mailings to large numbers of investors, hold periodic meetings
of shareholders, and seek the vote of shareholders before taking certain actions.
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 ANSWER…
ASSIGNMENT 2

C. SENIOR DEBT AMOUNT – AND SOURCE OF SENIOR DEBT

• Senior Debt, or a Senior Note, is money owed by a company that has first claims on the
company’s cash flows. It is more secure than any other debt, such as subordinated debt (also
known as junior debt), because senior debt is usually collateralized by assets. This means the
lender is granted a first lien claim on the company’s property, plant, or equipment in the event
that the company fails to fulfill its repayment obligations.
• Senior debt amount for ETHIO-DJIBOUTI RAILWAY LINE MODERNIZATION PROJECT
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is $3.3bn and it is from China's state-run EXIM Bank (70% of the project).
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 ANSWER Q#2
ASSIGNMENT 2

2. Explain advantages and constraints of foreign investments in infrastructure projects. If availed in

your project give details of foreign bank investment in your project.
• Foreign investment involves capital flows from one country to another, granting extensive ownership
stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role
in management as a part of their investment.
• Foreign investment helps a country's economy by allowing foreign investors to fill investment gaps in
manufacturing and infrastructure that may not be met domestically which can be very positive for GDP
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in open economies.
• And by encouraging foreign direct investment, governments can create jobs and improve economic
growth. For international investors, foreign direct investment plays an extremely important role. The
growth of emerging markets has been due in large part to incoming foreign direct investment.
• Countries receiving foreign direct investment often experience higher economic growth by opening it
up to new markets, as seen in many emerging economies. Job Creation & Employment.
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 ANSWER…
ASSIGNMENT 2

LIMITATION OF FOREIGN INVESTMENTS IN INFRASTRUCTURE;

• A wide range of things could potentially be considered a barrier or impediment to FDI.
• The costs of setting up communication links between the parent and the affiliate, or the costs of monitoring the
performance of the business from another country.
• Policy measures such as limits on the level of foreign investment, or the need to go through costly and time-
consuming screening processes to convince authorities that FDI in a project will be in the national interest, are
considered barriers.
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• a legislated monopoly in a sector would represent a barrier to market access for both foreign and domestic
investors.
• Direct restrictions which include measures that clearly specify quantity or value constraints on foreign investors’
market access or operations.
• Indirect restrictions which include those measures which will affect the market access, operations and profitability
of the foreign owned firm, but do not apply directly to either the inputs of the firms or the size of its investment.
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 ANSWER Q#3
ASSIGNMENT 2

3. Why do promoters feel necessity to go for Mezzanine investment?

• A mezzanine loan is a form of financing that blends debt and equity.
• 1 Lenders provide subordinated loans (less-senior than traditional loans), and they potentially receive
equity interests as well.
• Mezzanine debt has embedded equity instruments attached, often known as warrants, which increase the
value of the subordinated debt and allow greater flexibility when dealing with bondholders.
• Mezzanine financing is frequently associated with acquisitions and buyouts, for which it may be used to
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prioritize new owners ahead of existing owners in case of bankruptcy.

• It is usually listed as an asset on the company’s balance sheet. It is quickly available to the borrower
without any collateral. A convenient loan without collateral only means one thing, a higher rate of interest.
The rate of interest in relation to mezzanine financing can range anywhere from 12% – 20%. Typically, in
India, it can range from 13-14%, therefore, promoters feel necessity to go for Mezzanine investment.
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 ANSWER Q#4
ASSIGNMENT 2

4. DRAW A PROJECT LIFE CYCLE AND MARK CAPITAL SOURCING POSSIBLE AT

DIFFERENT STAGES.
 The project initiation stage: 
 Understand the goals,
 Priorities,
 Deadlines, and
 Risks of the project
 The project planning stage: 
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 Outline the tasks and timeline required to

execute on the project
 The project execution stage: 
 Turn your plan into action and
 Monitor project performance
 The project closure stage: 
 Analyze results,
 Summarize key learnings, and
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 Plan next steps

 ANSWER Q#5
ASSIGNMENT 2

5. Explain pictorially working capital cycle .When do u call an operating cycle efficient?
 Working Capital means funds that are used for running the day to day operations and trading.
 Working Capital = Current Assets- Current Liabilities
 Where,
– Current Assets include Cash, short term debtors, trade debtors, inventory and other assets that can be expected
to convert into cash within a year;
– Current liabilities include trade creditors, other short-term debts, accounts payable, accrued liabilities and other
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liabilities that are to be paid off in less than one year.

• The logic behind this formula is that only the amount which is over and above current liabilities can
actually be used in running operations of a business. Rest to the extent of current liabilities is like
“pledged” funds. Healthy or positive working capital means that business has a favourable cash
conversion and is able to generate funds internally from operations to meet the fund requirement of
running the operations. 
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IFM 2020 ASSIGNMENT 2

ANSWER…
 ANSWER Q#6
ASSIGNMENT 2

II. ASSESSED BANK FINANCE Amount INR in Crore

PROJECTED
ASSESSED BANK FINANCE AUDITED 2017-18 AUDITED 2018-19 ESTIMATED REVISED 2019-20 PROJECTED REVISED 2020-21
REVISED 2020-22

Net Sales 889.46 885.32 917.5 956.5

Inventory / Net Sales + Recievables /
Gross Sales 58 57 59 59  

Net Sales to Total tangible Assets 3.86 3.9 3.91 3.96 

Total Current Asset (TCA) 175.29 173.58 183.13 191.36 

Other current Liabilities (OCL) excluding

sundry creditors 2.32 8.7 4.1 4.95 
WC Gap (TCA - OCL) 40.21 39.85 49.03 54.41 
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NWC (TCA - TCL) 28.07 33.55 36.03 41.41 

Bank Finance (WC Gap - NWC) 12.14 6.3 13 13  
FBWC 13 13 13 13  
NFBWC 165.5 165.5 165.5 165.5  
NWC / TCA (%) 16.01 19.33 19.67 21.64 
Sr Cr / TCA (%) 75.74 72.03 70.99 68.98 
BF / TCA (%) 6.93 3.63 7.1 6.79 
OCL (excluding sundry creditors) / TCA
% 1.32 5.01 2.24 2.59 
OCA / TCA (%) 5.4 7.26 6.55 6.27 
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 ANSWER…
ASSIGNMENT 2

6. Answer the following from the ABF sheet attached with reasoning
a. How much is working capital loan bank is offering?
b. How much money will come from long term sources in working capital?
c. What is working capital gap? How is it sourced?

 Answers:
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a. 13 Crore of loan is offered by the bank

b. 19.67 Crore will come from long term sources in working capital
c. The WC gap is between total current asset and total current liability other than the bank. And, it is
sourced from Owner's Capital and terms loan.
IFM
 REFERENXES

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