Assignment Code: MMPF-002/TMA/ JULY/2023

Course Code: MMPF-002

Assignment Name: Capital Investment and Financing Decisions

Year: 2023

Verification Status: Verified by Professor

Q1) Discuss the distinguishing features of a project and describe the project life cycle.

Ans) A group of activities can be included in a project, which has a broader definition.

The characteristics that set a project apart are:

Purpose: A project is typically a one-time task with a clear set of targeted outcomes. It can be broken down into smaller activities that must be completed to meet the project's objectives. The subtasks need to be coordinated and controlled in terms of scheduling, precedence, cost, and performance because the project is so complicated. It is frequently necessary to coordinate the project itself with other initiatives being carried out by the same parent company.

Life Cycle: Projects have a life cycle, much like living things do. They move from a gradual start to a building of size, then peak, start a decrease, and need to be stopped. Many projects concluded by gradually integrating into the regular, ongoing activities of the parent company.

Single Entity: A project is a single entity that is typically assigned to a single centre of responsibility, even though there are numerous participants.

Interdependencies: Initiatives always interact with the parent's regular, ongoing operations. Projects frequently interact with other projects being worked on concurrently by their parent company. The patterns of interaction between projects and these departments tend to be shifting, whereas the functional departments of a company interact with one another in predictable, patterned ways. At the start and the finish of a project, marketing may be involved, but not in the middle. Manufacturing may have a significant role. Often, the beginning of the process involves finance, and the finish involves accounting, as well as periodic reporting times. The project manager must maintain the proper interrelationships with all external parties and keep track of all these exchanges clearly.

Uniqueness: Every project contains certain distinctive components. R&D and building projects are seldom the same. Even while it is obvious that building projects are typically more conventional than research and development projects, some level of personalization is a unique aspect of a project. A project could also be special in some way that prevents it from being entirely conventional. The significance of the project manager is highlighted as a proponent of management by exception, the manager will discover there are many exceptions to manage.

Complexity: A complicated combination of operations relating to various fields make up a rich project. The project's complexity is influenced by a variety of factors, including a technology survey, the selection of the best technology, the acquisition of the right machinery and equipment, the hiring of the right people, the planning of financial resources, and the timely completion of projects through careful planning of various activities.

Teamwork: Teamwork is necessary for a project to be completed successfully. Members of the team who are experts in related subjects make up the team.

Risk and Uncertainty: Every undertaking carries a certain degree of risk and uncertainty. The amount of risk and uncertainty will, however, depend on how quickly a project moves through each step of its life cycle.

Customer Specific: To meet the needs of the client, a project must always be customer specific. The company ought to pursue customer-friendly projects.

On the way from conception to completion, most projects go through comparable stages and known as the project life cycle. During the project's start-up phase, a manager is chosen, the project team and initial resources are put together, and the work schedule is set up. When the task begins, momentum swiftly develops. There is advancement. Until the end is in sight, this continues. The last tasks, however, appear to take an excessive amount of time to complete, in part because there are frequently several pieces that must come together and in part because team members "drag their feet" for a variety of reasons and put off doing the last steps.

A common pattern in project progress is slow-rapid-slow progress. It is mostly caused by the fluctuating amounts of resources consumed over the various stages of the life cycle. Project effort is function of time, where time is divided into the many phases of a project's life. Project effort is typically expressed in terms of person-hours or resources used per unit of time. At first, when the project concept is being developed and going through the project selection processes, little work is needed.

If this obstacle is overcome, the project's activity rate will grow when planning is completed, and the actual work begins. This peaks, starts to decline as the project nears completion, and finally stops when the assessment is finished, and the project is cancelled. The project team, or at least a cadre group, may be retained for the suitable project, therefore in some circumstances the effort may never reach zero. After that, the new project will appear.

Performance, time, and cost goals remain constant throughout the project's life cycle and are the main factors. Performance is prioritised in the initial stages of the life cycle. The team members concentrate on meeting the performance objectives of the project. Because these techniques call for the use of a science or an art, project competition achieves these objectives as the project's technology. When the major "how" issues are resolved, project staff can get fixated with performance improvement, frequently going beyond for in the initial specifications. The timeline is pushed back, and the prices are raised because of this search for more performance.

A growing preoccupation with cost containment is a hallmark of the middle stages of the life cycle. The emphasis of attention shifts to time during the last phases of the life cycle. As projects near completion, there is typically more cost flexibility and efforts are focused on keeping everything as close to the agreed timeline as feasible, even if doing so results in cost penalties. If one could forecast with certainty the performance time and cost targets would be fulfilled at the outset of a project, it would be a wonderful source of comfort. Producing pretty accurate projections in a select situation, such as normal construction projects, but frequently it cannot.

Q2) Explain the various techniques used for measurement of project risk.

Ans) Project risk measurement involves assessing and quantifying the potential uncertainties and threats that can impact a project's objectives, including its scope, schedule, budget, and quality. There are several techniques and methodologies used for measuring project risk.

Some of the commonly employed are the following:

Qualitative Risk Analysis

Risk Probability and Impact Assessment: This technique assesses risks based on their likelihood and potential consequences. Risks are categorized as low, medium, or high based on these factors.

Risk Matrix: A risk matrix is a visual tool that helps categorize and prioritize risks by plotting them on a matrix with probability on one axis and impact on the other.

Quantitative Risk Analysis

Monte Carlo Simulation: This technique uses statistical modelling to simulate multiple scenarios and project outcomes. It assigns probability distributions to various project variables, such as cost and duration, and then runs thousands of simulations to determine the likelihood of different project outcomes.

Sensitivity Analysis: Sensitivity analysis identifies which project variables have the most significant impact on the project's objectives. It helps prioritize risk management efforts on critical factors.

Expected Monetary Value (EMV): EMV is a technique that calculates the average outcome of a risk event by multiplying the probability of occurrence by its monetary impact.

Risk Scoring Models

Risk Scorecards: Risk scorecards assign scores or ratings to different risks based on predefined criteria like likelihood, impact, and urgency. The scores help in prioritizing risks.

Risk Priority Number (RPN): Often used in Failure Modes and Effects Analysis (FMEA), RPN is a product of severity, occurrence, and detection scores assigned to various risks. It helps in ranking risks by their potential impact.

Expert Judgment

Drawing on the expertise and experience of project team members, stakeholders, or external experts to assess and quantify risks. This is often used in conjunction with other quantitative and qualitative techniques.

Historical Data Analysis

Reviewing historical project data to identify patterns and trends related to risks. This can help in estimating the likelihood and impact of similar risks on the current project.

Delphi Technique

A consensus-based technique in which experts provide anonymous input on risks, and the responses are aggregated and iteratively refined until a consensus is reached.

Checklists and Risk Registers

Using checklists and risk registers to systematically identify, document, and assess risks. This helps ensure that potential risks are not overlooked.

Scenario Analysis

Developing various scenarios that represent different combinations of risk events and their potential impacts on the project. This technique helps in understanding the range of project outcomes.

Decision Trees

Decision trees are used to evaluate different decision options in the face of uncertainty. They can help in assessing risks associated with choosing a particular course of action.

Risk Software Tools

Utilizing specialized software tools designed for risk management, which often incorporate various risk measurement techniques and facilitate scenario modelling and analysis. Effective risk measurement involves a combination of these techniques, tailored to the specific needs and complexity of the project. The goal is to provide project managers and stakeholders with a clear understanding of potential risks and their potential impact on project success, allowing them to make informed decisions and implement appropriate risk mitigation strategies.

Q3) What are the various global sources of financing? Discuss the salient features of depository Receipts Scheme, 2014.

Ans) The various global sources of financing are the following:

The Foreign Bond Market: The component of the domestic bond market that features securities offered by governments or corporations from other countries is known as the international bond market. The bond issues floated by Indian or any other foreign firm or government and purchased by citizens or corporations of these nations will serve as a proxy for the foreign bond market in the US or Germany.

The growth in reputation brought on by institutional investors' thorough examination, the diversification and expansion of the investor base, and the cheaper cost of funding are the key benefits of using foreign bond markets. The three main categories of foreign bond instruments are equity-related issues, floating-rate issues, and fixed-rate issues.

In fixed-rate issues, the interest rate is set for the duration of the issue, the maturity date is set, and the principle is fully repaid when the issue matures. Bonds with floating rates have interest rates that change over the course of their lifespan and are reset at regular intervals. The new interest is established at a predetermined fixed margin above a reference benchmark rate, such as the rate on Treasury Bills or the rate on Commercial Paper. The equity linked bonds mostly come in two categories and combine characteristics of both bonds and equity.

Fixed-rate bonds that are convertible into equity at a predetermined rate prior to maturity are known as convertible bonds. Equity warrants give their owners the option to purchase a predetermined number of shares at a predetermined price within a predetermined time.

The Foreign Equity Market: Cross listing of the company's shares over different stock exchanges located in different countries is the obvious choice when corporations desire to obtain equity capital from varied investors, whether through an Initial Public Offering (IPO) or through a seasoned equity offering. Companies can diversify their equity funding risk by listing overseas. Sometimes, because of the size of the stock offerings, the full funding need might not be covered by a single domestic market.

The prospective demand for the company's shares, and thus the price, may rise because of a foreign offering. Foreign listing, particularly in the US, can cut cost of capital and increase valuation by up to 10% in comparison to national and sector standards. Corporate governance is currently a key concern for all investors.

Listing on international exchanges necessitates careful examination of corporate governance, foreign listing reassures investors about the sufficiency of corporate governance. Due to increased public awareness of the company because of its foreign listing, prospective sales of the company's goods and services in these countries may also rise.

Foreign Bank Market:The fraction of domestic bank loans given to foreign customers for usage abroad is known as the foreign bank market.

Project Finance: Many large-scale, expensive, long-term capital investments are funded through project finance. A nonrecourse loan secured by a project and potential project-related cash flows is known as project finance. The ownership structure of the project, which is owned by a single purpose corporation also known as a special purpose vehicle, distinguishes the future of project financing (SPV).Legal independence from its sponsors exists for this SPV.

According to the definition of project finance, it is "the raising of funds to finance an economically separable capital investment project in which the funders of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity investment in the project."

Indian enterprises are allowed to raise capital from non-residents in the form of debt or equity, subject to the Foreign Exchange Regulations and other pertinent rules in this regard. The corporation has used the ADR/GDR route to raise equity capital; this method was improved with the introduction of the Depository Receipts Scheme in 2014.

The Salient Features of the New Scheme Are:

1. The securities in which a person resident outside India is allowed to invest under Schedule 1, 2, 2A, 3, 5 and 8 of Notification No. FEMA. 20/2000-RB dated 3rd May 2000 shall be eligible securities for issue of Depository Receipts in terms of DR Scheme 2014.

   
   

2. A person will be eligible to issue or transfer eligible securities to a foreign depository for the purpose of issuance of depository receipts as provided in DR Scheme 2014.

   
   

3. The aggregate of eligible securities which may be issued or transferred to foreign depositories, along with eligible securities already held by persons resident outside India, shall not exceed the limit on foreign holding of such eligible securities under the extant FEMA regulations, as amended from time to time.

   
   

4. The aggregate of eligible securities which may be issued or transferred to foreign depositories, along with eligible securities already held by persons resident outside India, shall not exceed the limit on foreign holding of such eligible securities under the extant FEMA regulations, as amended from time to time.

   
   

5. The eligible securities shall not be issued to a foreign depository for the purpose of issuing depository receipts at a price less than the price applicable to a corresponding mode of issue of such securities to domestic investors under FEMA, 1999.

   
   

6. It is to be noted that if the issuance of the depository receipts adds to the capital of a company, the issue of shares and utilisation of the proceeds shall have to comply with the relevant conditions laid down in the Regulations framed and Directions issued under FEMA, 1999.

   
   

7. The domestic custodian shall report the issue/transfer of sponsored/unsponsored depository receipts as per DR Scheme 2014 in ‘Form DRR’ as given in Annex within 30 days of close of the issue/ program.

Q4) What do you understand by Financial Restructuring? How will you assess merger as source of value addition.

Ans) Financial restructuring is the process of reorganising the business by making significant changes to the ownership structure, asset mix, and operations that are not typical of everyday business. Therefore, financial restructuring includes a wide range of activities, including capital reorganisation, spin-offs, divestitures, leveraged transactions, recapitalization, and financial reconstruction.

While taking decision whether to acquire a firm, finance manager of a firm must ensure that this step would add value to the firm. For this purpose, he must assess merger as source of value addition and the procedure is mentioned below:

Finding out if the merger will result in a profit. Only when the combined value of the two enterprises exceeds their individual values can there be an economic gain. The difference between the present value of the combined entity (Pvxy) and the present value of the two entities if they remained separate (Pvx+Pvy) is hence the economic gain of the merger.

Gain= Pvxy-(Pvx+Pvy)

Getting a price estimate for purchasing company Y. If cash is used to pay for the transaction, the price of Y is calculated by deducting the cash payment from the price of Y on its own. Thus,

Cost=Cash paid-Pvy

Calculating the merger's net present value to X. The difference between the gain and the cost is used to calculate if. Thus,

NPV=gain-cost

Q5) Calculate the Operating Leverage, Financial Leverage and Combined Leverage from the following data under situation I and II and Financial Plan A & B.