tested theory with real-life data. At times I have not revealed the name of the company for the sake of
confidentiality.
Brief Description of Topics Covered
Corporate Financial Flexibility (Real Options)
Most corporate investments grant managers a great deal of flexibility such as the right to abandon, expand or
add technologies. This flexibility is best described as a series of options. The chapter on real options focuses
on the analysis of this type of corporate investment decisions under uncertainty. I have covered simulation of
capital structure under financing although both deal with corporate financial flexibility.
New Financial Instruments
The chapter on financing choices has been written to provide an understanding of how financial engineering
can be used to advance the strategic goals of firms. While the perspectives of issuer, intermediary and
investor are all relevant, special emphasis is given to problems faced by corporate finance managers. The
goal of this chapter is to show how financial managers can utilize capital markets technology to create value.
The chapter deals with the design and pricing of a wide range of instruments.
Project Finance
The chapter on project finance has a particular emphasis on how firms structure, value, and finance large,
greenfield projects such as telecommunications systems, toll roads, manufacturing plants, and mines.
Interestingly, many of the largest projects have encountered financial distress. For example, Eurotunnel,
Euro Disneyland, and Iridium have all been restructured.
Project finance is a method of financing an economically viable project on the basis of the cash flows it is
expected to generate. The project is a separate legal entity and its cash flows are segregated from the sponsoring
organization. The sponsor may be the main user of the project’s output, contractor or supplier, a consortium
or a government. The revenue generated from the project should be adequate to cover all operating expenses,
debt-servicing burden and provide an adequate return to the equity investors. This enables the sponsors to
shift the operating risk and debt-servicing burden to the project entity while retaining some benefits from the
project. Project finance is usually restricted to large scale, capital intensive projects and often involves a
high proportion of debt finance (60–90 percent) provided by a group of lenders. Toll roads, tunnels, bridges,
ports and power projects are general candidates for project financing. The Eurotunnel project in France, Hub
power project in Pakistan, and Petrozuata in Venezuela are some of the prominent project finance transactions.
I have extensively revised the material on project finance. I have also included a real-life case on HPL
Cogeneration Ltd.
Acquisitions and Control
In the recent years, the worldwide M&A volume has been averaging $2 trillion. The chapter on takeovers
focuses on purchase and sale of equity whereas the case on ICICI Bank focuses on the design of consideration
Preface 17