Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook

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270 QUESTIONS AND PROBLEMS

MACRS asset and is expected to have a salvage value of

$5,000 at the end of the 5-year useful life. If leased, the

payments are $35,000 each year for four years, payable at

the beginning of each year. The marginal tax rate for

Xhaust is 30% and the cost of capital is 12%. Assume

that the lease is a net lease, that any tax beneﬁts are real-

ized in the year of the expense, and that there is no invest-

ment tax credit.

a. Calculate the depreciation for each year in the case of the

purchase of this machine.

b. Calculate the direct cash ﬂows from leasing initially and

for each of the ﬁve years.

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Equipment Leasing 271

c. Calculate the adjusted discount rate.

d. Calculate the value of the lease.

e. Calculate the amortization of the equivalent loan.

Ch27 Page 271 Tuesday, December 16, 2003 9:17 AM

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CHAPTER

273

Project Financing

FILL IN THE BLANKS

Refer to Chapter 28, pages 917–930 in Financial Manage-

ment and Analysis.

1. ______________ ﬁnancing is a debt obligation that is

backed by the ______________ of an asset or credit sup-

port provided by a third party. The key in an asset

______________ is to remove the assets (i.e., loans and

receivables) from the ______________ sheet of an entity.

The special purpose ______________ (______________) is

the entity that acquires the ______________ and sells the

______________ to purchase the assets.

2. Structured finance is used by ______________ to fund

major projects. A benefit to using structured finance is that

the lenders look to the cash ______________ from the

project being financed rather than the corporation or

______________ seeking funding. This financing technique

is called ______________ financing and uses the

______________ to accomplish its financing objectives.

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274 QUESTIONS AND PROBLEMS

3. While a(n) ______________ may be willing to look initially to

the cash ______________ of a project as the source of funds

for ______________ of the loan, the lender must also feel

comfortable that the loan will in fact be ______________ on

a(n) ______________-case basis. This may involve undertak-

ings or direct or indirect ______________ by third parties

who are motivated in some way to provide such guarantees.

4. The ______________ party in a project is its promoter or

______________. A project may have one or several

______________. The motivation of ______________ com-

panies acting as sponsors is to profit in some way from

the ______________ or ______________ of the project.

The motivation of ______________ companies for spon-

soring a project may be simply to make a(n)

______________ from selling the product produced by the

project. In many instances, the motivation for the project

is to provide ______________ or ______________ of a

sponsor’s basic product or to ensure a source of supply

vital to the sponsor’s business.

5. The ultimate goal in project financing is to arrange

______________ for a project which will benefit the

______________ and at the same not affect the

______________ standing or ______________ sheet. One

way this can be accomplished is by using the credit of a(n)

______________ party to support the transaction. Such a

party then becomes a sponsor. However, projects are

rarely financed ______________ on their own merits with-

out credit support.

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Project Financing 275

6. Project ______________ regard a project as acceptable

only after the plant or facility has been in ______________

for a sufficient period of ______________ to ensure that

the plant will in fact ______________ the product or ser-

vice at the price, in the ______________, and to the stan-

dards assumed in the financial ______________ that

formed the basis for the financing. This ______________

risk period may run from a few months to several years.

7. Project financing can sometimes be used to improve the

______________ on the capital ______________ in a

project by ______________ the investment to a greater

extent than would be possible in a straight ______________

financing of the project. This can be accomplished by locat-

ing other ______________ interested in getting the project

built, and shifting some of the ______________ coverage to

such parties through ______________ or ______________

guarantees.

8. ______________ benefits from any applicable tax credits,

______________ deductions, ______________ deductions,

______________ deductions, ______________ and devel-

opment tax deductions, ______________-received credits,

______________ tax credits, ______________ gains, and

noncapital start-up expenses are very significant consider-

ations in the investment, ______________ service, and cash

flow of most project financings. Care must be used in

structuring project financing to make sure that these tax

______________ are used.

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276 QUESTIONS AND PROBLEMS

9. When a project financing is housed in a(n) ______________

entity that does not have ______________ to shelter, it is

important to structure the project financing so that any tax

benefits can be ______________ to parties currently in a

position to ______________ such tax benefits. For U.S. fed-

eral income tax purposes, ______________ control is

required for tax ______________, except in the case of cer-

tain ______________ subsidiaries, in which ______________

control may require consolidation.

SHORT ANSWER QUESTIONS

Refer to Chapter 28, pages 917–930 in Financial Manage-

ment and Analysis.

1. Why is project ﬁnancing appealing?

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Project Financing 277

2. What are the credit exposures in a project financing?

3. What are some causes of project failures?

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278 QUESTIONS AND PROBLEMS

4. What is nonrecourse borrowing?

5. What are some of the incentives and disincentives of

project financing?

Ch28 Page 278 Tuesday, December 16, 2003 9:19 AM

CHAPTER

279

Strategy and Financial Planning

FILL IN THE BLANKS

Refer to Chapter 29, pages 933–967 in Financial Manage-

ment and Analysis.

1. Budgeting is mapping out the sources and uses of funds

for future periods requiring both ______________ analy-

sis, including ______________, and ______________.

______________ analysis includes both ______________

and ______________ analysis to develop forecasts of future

______________ and ______________. ______________

techniques are used as a measurement device but instead

of using accounting to ______________ what has hap-

pened, in budgeting, ﬁrms use accounting to

______________ what we expect to happen in the future.

2. A(n) ______________ advantage is the advantage one firm

has over others in terms of the cost of ______________ or

______________ goods or services. A(n) ______________

advantage is the advantage one firm has over another

because of the structure of the markets (input and output

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