BUSM4617 - Project Financial Management: Investment Portfolio Analysis

This essay provides a comprehensive analysis of project finance and investment portfolios, contrasting it with corporate finance. It discusses the fundamental differences between the two, highlighting the advantages and disadvantages of each approach. The essay further delves into the reasons why debt is often a cheaper source of capital compared to equity and explains the concept of optimal capital structure. Finally, it examines how risk is assessed within a portfolio, detailing the impact of adding more assets and strategies for risk mitigation. The report concludes that corporate finance is related to the managing of the financial resources of the company. Desklib offers a wealth of resources for students, including past papers and solved assignments.

PROJECT FINANCE
INVESTMENT
PORTFOLIO
Table of Contents

INTRODUCTION.......................................................................................................................3
TASK........................................................................................................................................3
1. Discuss the Basic difference between corporate finance and project finance. Also quote the
advantages and disadvantages of both..............................................................................................3
2. State reasons why debt is cheaper than equity. Also explain Optimal structure............................6
3. How risk in a portfolio is examined. Describe the effect of portfolio as more asset being added.. .7
CONCLUSION...........................................................................................................................9
REFERENCES..........................................................................................................................10

INTRODUCTION
The corporate finance is defined as the area of the finance which deals in the various sources
of funding and the capital structure of the business corporations (Asai, 2020). It is very important
for the managers to take the necessary actions in order to increase the value of the business
enterprise to the shareholders, there are various tools which need to be considered in order to use
effectively and efficiently with the financial resources of the business organisation. It is
identified that debt financing involves the borrowing of the monetary aspect where it is observed
that equity financing is related to the selling a portion of equity within the business organisation.
This report will include the discussion on the various topic which is the dissimilarity among the
project finance as well as corporate finance attitude towards fund based capital projects,
explanation on why the debt is cheaper than equity and at last it will include discussion on how
the riskiness of portfolio measures, how to measure the more assets to the portfolio how to
eliminate risk within the portfolio.
TASK
1. Discuss the Basic variance between project and corporate finance. Also quote the benefits and
shortcomings of both.
It can be defined as a long-term, zero or limited alternative financing solution which is
available for the borrower against the assets, rights and interests which mainly depends upon the
concerned project. If any individual plan to start any industrial, infrastructure or public services
projects but need some resources for the same, then project financing is one of the best solutions
that they are looking for (Berrou, Dessertine, and Migliorelli, 2019). The repayment of loan can
only be completed by utilizing the cash flows which are created once the project is done rather
than the balance sheet of the investors. In case the debtor fails to pay the amount of loan, then the
creditor has a right to take control of the project. Along with this finance companies can generate
good margins if a firm use this system while partially shifting the related project risks. Generally,
this type of loan system is more in favor of investors, firms and lenders.
It mainly bridges the gap between the investors and lenders, an intermediary is created namely
special purpose vehicle (SPV). The main function of SPV is to manage the resources procuring
and managing to ensure that the project assets.

Difference between Corporate finance and Project financing:
Corporate financing:
 Corporate funding refers to the monetary supervision of a general business, such as
deciding the organization's financial model, then, at that fact, growing the money and
ultimate use of resources, and improving the functioning of the corporation. Interestingly.
 Stage: Benefited during the commencement of an organization and during any
development
 Basis of credit evaluation: Asset report, income, and by and large monetary strength of
the organization.
 Risk: Risk is normal and merged. Any awful undertaking might influence the over tasks
of the business element.
 Returns: Returns are Moderate as chance and returns are shared.
 Security/Collateral: Generally speaking, resources/incomes of the organization.
 Type of capital: Long-lasting and exists over the lifetime of the business
 Reinvestment: Least prohibitive agreements by the members, for the most part
administrative
 Financial structure: Normal and Simple monetary designs
 Transaction expenses: Minimal expense because of chance sharing and straightforward
design
 Financial elasticity: Higher monetary adaptability because of less prohibitive agreements
Project financing:
 Project financing mentions to taking monetary choices like wellsprings of assets,
contracts with merchants, and discussion.
 Stage: Benefited by laid out SPVs wandering into new tasks.
 Basis of credit evaluation: Project practicality investigation, project resource esteem, and
estimated income.
 Risk: Risk is confined and ringfenced to the task and doesn't gush out over to different
organizations/projects.
 Returns: Returns are high as the gamble is high
 Security/Collateral: Restricted to just the undertaking resources/incomes
 Type of capital: Limited and restricted to just the life expectancy of the undertaking

 Reinvestment: Reinvestment from income isn't permitted and must be stuck to according
to the authorized states of the members.
 Financial structure: Tailormade monetary designs that fluctuate from one case to another.
 Transaction expenses: Greater expenses because of tailor-made documentation
necessities.
 Financial elasticity: Low Financial adaptability because of profoundly prohibitive
pledges.
Advantages of Project financing:
 Accomplishing economic rent: One express benefit of undertaking supporting is the
utilization of this sponsoring normal to ordinary resource extraction, especially in
while these resources are acquainted limit or are obtained at reasonably low expenses.
 Risk distribution: The joint endeavour contributes and assists the accomplices with
lessening the expense of the venture. In the event that the speculation cost is high as it
connects with the capitalization of the support, the judgment for the most part on the
financing of the venture assets may truly risk the fate of the support (Brusov,
Filatova, and Eskindarov, 2018).
 Minimizing overall costs: Expecting adventure supporting aides address up issues that
are fundamental for settling a particular issue, the assignment would be prepared for
gathering pledges at lower costs than the benefactors. Stood out from theories, the
endeavour affiliation can earn a more critical college education of commitment than
the allies could do as a compromise for esteem capital.
Disadvantages of Project financing:
 Complexity: The financing of the task depends on a progression of agreements
including concurrences with all undertaking members. Dealings themselves can be
exceptionally convoluted and frequently exorbitant to complete.
 Higher transition expenses: It needs greater sponsoring expenses relative with those
brought about backhanded supporting due to its complexity. It tackles the legally
binding payments in the plan of the financial system of the venture.
 Indirect credit support: The development cost is higher for all of the banks in any case,
coming about on account of underhanded credit relief.
Advantages of corporate finance:

 Limited liability: The financial backers of an undertaking are essentially capable
up to how much their theories. The corporate substance shields them from any
further liability, so their own assets are gotten. This is a particular advantage
when a business routinely faces gigantic risks difficulties which it might be
normal to assume liability.
 Source of capital: A naturally held organization explicitly can raise critical
aggregates by selling offers or giving bonds. This is a particular advantage when
its bits trade on a stock exchange, where exchanging shares is clearer.
 Pass through: Accepting the undertaking is coordinated as a S association, advantages
and disasters are gone through to the financial backers, so the organization doesn't follow
through with yearly costs.
Disadvantages of corporate finance:
 Independent management: Fluctuating organization In the incident that there are
various economic backers having no sensible bigger part interest, the regulatory
crew of a partnership can work the industry with no real error from the managers.
 Double taxation: Dependent upon the kind of big business, it could pay charges
on its compensation, after which financial backers convey charges on any benefits
got, so pay can be troubled twice.
2. State reasons why debt is cheaper than equity. Also explain Optimal structure.
Debt: Debt refers to an amount of cash claimed by one individual to another. Obligation is
fundamentally reserve acquired by any person using a credit card. It is utilized by numerous
associations and people to make instalments of costs or making huge buys that couldn't be
managed under ordinary circumstances. An contract is acquired under condition that it is to be
taken care of at a foreordained date, for the most part with interest. Obligation is primarily
partitioned into two sections long haul obligation and transient obligation (Correspondent, 2019).
Long term debt: the debt which outstanding amount is due in more than one year. Long term
debts are important element of company's solvency ratios, which is measured by shareholder and
investors to know solvency risk. Example of long-term debt are bank loans, bonds etc.
Short term debts: The outstanding amount that is payable to creditor within a year. Short term
debts help a firm to maintain their liquidity financial position. Short term debts include: sundry
creditors, bank loans, wages and account payable (Hull, 2019).

Equity: Equity refers to the value attributable to proprietors of a company. The book value of
equity is the difference between assets and liabilities of the company's balance sheet. Equity
doesn't carry a repayment situation. Company raises fund with the help of equity for expansion
purpose. Equity shareholder are the owners of the company. It is also helping a firm to meet
liquidity needs. Equity finance is the major source of finance for a company. Equity finance can
be raised by selling preference shares, equity share and bonds.
 An ideal capital construction is the best blend of obligation and value funding that boosts
an organization's reasonable worth while limiting its expense of capital.
 Limiting the weighted normal expense of capital (WACC) is one method for streamlining
for the most minimal expense blend of funding.
 As indicated by certain financial analysts, without charges, liquidation costs, office costs,
and lopsided data, in a proficient market, the worth of a firm is unaffected by its capital
construction.
3. How risk in a portfolio is examined. Describe the effect of portfolio as more asset being
added.
Portfolio is a combination of various stocks which are listed in the financial market or
commodities used for the investment purpose. Riskiness of a portfolio is measured in terms
of the equity involved in the project. Basically, a portfolio is mainly consisting of a equity,
bonds, cash, etc.
In a portfolio if more of asset are added then the portfolio will become safer as before. Assets are
considered as less risky source of investment, it safer source of investment which is used by
the investor whom wants to invest in safer commodities. Assets are selected in the portfolio
to reduce the risk of the portfolio.
If enough of the assets added to the portfolio, then the risk of the portfolio will be lower and is
considered as a safer portfolio (Ewald and Taub, 2020).
 The most serious gamble confronting any portfolio is market risk. This is otherwise
called efficient gamble. Most resources associate somewhat. The outcome is that a
financial exchange crash will bring about most stocks falling. As a matter of fact,
most monetary resources will lose esteem during a bear market.

 At the opposite finish of the gamble range is expansion risk. This is the gamble that a
portfolio's purchasing power won't stay aware of expansion. Consequently, the
explanation a portfolio needs to incorporate "hazardous resources" and chance should
be made due. Over the long haul, possessing dangerous resources permits you to beat
expansion (Graham, 2021).
 Reinvestment chance can influence the whole bond piece of a portfolio. Assuming
securities are bought when yields are high, the holder procures those exceptional
returns regardless of whether financing costs fall. Be that as it may, assuming yields
are low when the security develops, the chief can't be reinvested at a high return.
 Fixation risk concerns the connection of resources inside a portfolio. Having a lot of
openness to explicit areas, resources, districts can make foundational takes a chance
for that part of the portfolio. Secret gamble can happen when resources don't appear
to be corresponded yet are impacted by similar financial powers. For instance,
Chinese values, wares and developing business sector monetary standards would be
generally impacted by a decline in the Chinese economy.
CONCLUSION
From the above report it is concluded that corporate finance is related to the managing of the
financial resources of the company in order to take the better decisions and planning for the
investment for the future growth of the company. There is the disparity between the corporate
finance and project finance where the corporate finance means managing the wealth of the
shareholders and project finance is used to finance the project of the company in a sequential
manner. It is also identified that the debt is cheaper than equity because the debt has a real cost to
it and the equity has a hidden cost. This means that the hidden cost is higher than the debt. This
is why it is said that the equity is the risky investment for the business organisation. It is also

analysed that modern portfolio makes use of the various statistical indicators which is important
for the business organisation. The various indicators can be used in order to measure the
riskiness of the portfolio.

REFERENCES
Books and Journals
Asai, K., 2020. Corporate Finance and Capital Structure: A Theoretical Introduction.
Routledge.
Berrou, R., Dessertine, P. and Migliorelli, M., 2019. An overview of green finance. The rise of
green finance in Europe, pp.3-29.
Brusov, P., Filatova, T., and Eskindarov, M., 2018. Modern corporate finance, investments,
taxation and ratings. Springer International Publishing.
Correspondent, I.F.L.R., 2019. IFLR Most Innovative Deals Europe 2019: Project finance. International
Financial Law Review.
Ewald, C.O. and Taub, B., 2020. Real options, risk aversion and markets: a corporate finance
perspective. Risk Aversion and Markets: A Corporate Finance Perspective (April 21,
2020).
Graham, J.R., 2021. Supplemental Materials: Corporate Finance and Reality. Available at SSRN
3994851.
Hull, C.W., 2019. Addressing the Energy Question: Considerations of Development and
Finance. In Macro-Engineering and the Future (pp. 119-144). Routledge.
Klettner, A., Kelly, S., and Brown, P., 2019. Risk management: Australia's sustainable finance
agenda: Implications for corporate governance. Governance Directions, 71(10), pp.551-
558.
Lingesiya, K., 2018. Corporate finance practices in Sri Lanka.
Pace, E., 2018. Project finance implementation in sports financing: AS Roma Stadium.