Management Engineering - Financing complex projects

Full exam

6/26/23, 10:36 AM Polimi - Financing Complex Projects - 2023.06 - Final Written Exam Polimi - Financing Complex Projects - 2023.06 - Final Written Exam •The Final Written Exam is taken by students on campus, in a supervised classroom, digitally, on their PCs or tablets. It is presented through this Microsoft Forms link. •Students will be graded on what you submit through the provided link by the end of the test, only. •In open exercises that require calculations, you are invited to write with normal keyboard symbols (i.e. no math editor will be available), as calculations will not required more complex editing. The two mock problems below include a proposed solution, written in a format that should provide an example to follow during the exams. •During the test, students will be allowed to use scrap paper, which, however, will not be graded. •Students are allowed to use a calculator (excluding calculators that allow storing formulas or present value automated calculations). No notes or books are allowed during the test. •Please round numbers to the second decimal (for percentages, to the fourth), where necessary. •“Ordinary students” (refer to the Syllabus for their definition and requirements) are required to answer the “Open Questions” and the “Multiple Choice Questions” sections . Their exam lasts 60 minutes . •“Eligible students” (refer to the Syllabus for their definition and requirements) are required to answer the same sections described above for "Ordinary students" and the "Additional Questions" section, separately provided, with 10 extra minutes. Multiple Choice Questions 1. Which of the following statements about the contractual network is correct? Financial sponsor are mostly active in projects with a concession agreement only A more efficient incentive structure is reached when the counterpart of a project con - tract is also an industrial sponsor A less efficient incentive structure is reached when the counterpart of a project con - tract is also an industrial sponsor A dual role is when more than one category of sponsors are part of an equity contri - bution agreement 6/26/23, 10:36 AM 2. Think of a project for a toll road: Which of the following contracts would less likely be included in its contractual network? A long term sales agreement An equity contribution agreement A construction agreement An operation and maintenance contract 3. In a build, own, operate and transfer contract : The private investor enters the concession agreement with the authority, while owning the assets, which the investor will have to build and manage The private investor enters the concession agreement with the authority, which the in- vestor will have to build and manage The private investor is transferred ownership of an asset by the authority, which the in- vestor will have to manage None of the other answers is correct 4. Which of the following sentences is correct? Hedging against fluctuations of macroeconomic variables is often a condition prece - dent for lenders to provide financing The profit margin of a project is unaffected by base risk It is not in the interest of lenders that the SPV hedges against interest rate risk None of the other answers is correct 5. What phase of the project is public opposition a source of risk in? Post -completion phase Pre -completion phase Both phases (pre - and post -completion phases) None of the other answers is correct Polimi - Financing Complex Projects - 2023.06 - Final Written Exam 6/26/23, 10:36 AM 6. Which of the following are typical indirect investments during the construction phase? VAT (Value Added Tax) on direct investments The price of the construction contract Owners' Cost Cost of purchasing the land where the facility will be built 7. Consider the following inputs: capitalized construction costs = 200,0. Debt outstanding at the beginning of operations = 100,0. Stable EBITDA in operations = 75,0. Years in operations = 10,0. Interest rate (on beginning values) = 5,0%. Income tax rate = 50,0%. Constant principal payment = 20,0. Determine the cash flows available for debt service (CFDS) at the end of the second year in operations. 24,0 49,5 25,5 None of the other answers is correct 8. Which of the following statements about Financial Covenants are correct? Financial covenants refer only to the obligations of Lenders to make the project bank accounts specified in the credit agreement available to borrowers Financial covenants are obligations related to building and operating the plant and the project according to sound industrial and business criteria. Financial covenants are obligations to obtain the administrative authorizations listed in the relative annex to the credit agreement. Financial covenants can be a minimum level of financial ratios requested of the SPV. Polimi - Financing Complex Projects - 2023.06 - Final Written Exam 9. Consider the following project: Project's Value: 300. Project amortized 20% per year. Loan: 150, 5% fixed rate amortized in constant principal repayments for 5 years. Tax: 50%. EBITDA in the first five years (operating life): 100. What is the interest payments in year 2? 6,0 7,5 4,5 None of the other answers is correct 10 . A feature of a shareholders' agreement is that in most jurisdictions, it is a public document, alongside the articles of association and the company bylaws for every corporation in most jurisdictions, it is drafted according to a rigid structure mandated by the local corporate law it can only be entered into by shareholders of a listed company it helps regulating the relationship among several shareholders 11 . Which of the following statements is incorrect? An example of an adaptation strategy to fight climate change is introducing a carbon tax Adaptation strategies to fight climate change aim at reducing the negative conse - quences of climate change An example of a mitigation strategy to fight climate change is tightening requirements in industrial processes and production Mitigation strategies to fight climate change aim at reducing the causes of climate change 6/26/23, 10:36 AM Polimi - Financing Complex Projects - 2023.06 - Final Written Exam 6/26/23, 10:36 AM Polimi - Financing Complex Projects - 2023.06 - Final Written Exam No geographic diversification Assets with high expected returns and a high -risk profile All of the other answers is correct 13 . Consider the guest speech by a member of Ardian, presenting the Luton Airport Case Study. Which of the following statements is correct? The Luton Airport was kicked off by Ardian in 2013; it took 3 years of constructions. Later, after 2 years in operations, Ardian exited the project by selling the asset in 2018 During the holding period, Ardian refinanced the outstanding debt of the Luton Airport, in order to exploit a more favourable interest rate environment, but no addi - tional debt was raised The Luton Airport was an already -operating, fully efficient asset Ardian invested in during 2013, until 2018. Key return generation drivers are financial leverage and an ex - ogenous expansion of air travel in the period None of the other answers is correct Essay Questions 14 . Consider an engineering, procurement and construction (EPC) contract. Define its main characteristics, back -to -back clauses and its common cancellation policies 12 . Consider ASTM's guest speech. ASTM's strategy is based on: A mix of internal (organic) and (external) inorganic growth 6/26/23, 10:36 AM Polimi - Financing Complex Projects - 2023.06 - Final Written Exam 15. A large renewable energy company is already operating a power plant (Project 1), whose debt is equal to €m 100 and its expected cash flows are equal to €m 120. The company is considering structuring a new plant (Project 2), whose debt would be equal to €m 50 and the expected cash flows should be equal to €m 30 (which suggests that Project 2 would be insolvent on a standalone basis). Project 2 can financed in two alternative ways: - Solution 1: on -balance sheet, i.e. in the holding company, currently operating Project 1 - Solution 2: off -balance sheet, in a separate legal entity, wholly owned by the holding company Assess if Solutions 1 and 2 lead to default, i.e. if creditors will be paid off, or they will not, according to the given present values. In Solution 2, assume that the NewCo set up for Project 2 pays out any residual cash to the holding company as a dividend. 16 . A lending bank is considering financing an infrastructure project with a loan. Generally speaking, what are the two ways to structure the debt repayment schedule? Also, define a key ratio that is fundamental in structuring one of the two schedules 17 . An infrastructure project is entering its operational phase next year. Its expected cash flows available for debt service in the next three years are equal to €m 24, 80 and 100, respectively. Debt is repaid under a constant payment amortization plan, equal to €m 60. The interest rate is equal to 8%. At the beginning of operations, the project company has a cash balance equal to €m 45. Determine each year's debt service coverage ratio and the average debt service coverage ratio (DSCR). According to the lending bank, the loan contract should include a covenant requiring DSCR to be greater or equal to 1 in each year, in order to ensure the project solvency. Do you agree with this request, and why?