Finance Task Harvard Case Solution & Analysis

Case I

Question No. 1: Risks

The major risks in this project are as follows.

  • First of all, the new project that would be operated by a joint venture between First Solar and Azure Power, i.e. Maharashtra Solar is such that both the companies own 50 percent of each. This can prove to be deadly in situations where both the companies do not agree on common grounds.
  • Secondly, the capital structure of the project is such that the solar power plant is based on 25 percent equity and 75 percent debt. This again can prove to be drastic. Such high ratio of debt to equity can make the project go in vain if any unwelcomed circumstances arise in the project. And, if by any chance, the new company is not able to pay off its debt obligations.
  • There is the risk of exchange rate involved in the energy sector especially when there is a foreign company involved, which is true in our case. This increases the risk as the cost can be in two currencies, the currency of the foreign company and that of the local, but the revenues will be in single currency. In addition to this, the risk gets even more complex as it can arise at any time of the PPA.
  • The company is asking for a non-recourse debt from the bank, now this can impose a risk on the bank as well. As, in non-recourse debt, there is a collateral involved, if the company defaults, then the bank gets the ownership of the collateral. The risk is that if the value of the collateral is even less than the full amount that the buyer has to pay, the bank cannot ask for additional compensation.

Finance Task Harvard Case Solution & Analysis

How to Mitigate the Risks?

In order to mitigate the above mentioned risks associated with this project, following steps can be taken.

  • The main risk that will be faced is the non-continuation of the project that is for a long tenure of 15 years, the risks facing to the overall project and interest income received by the bank needs to be mitigated.
  • The next big risk is related to the joint venture, it is suggested that, as First Solar is a multinational company, it should own up to 75 percent of the company. This would give it the upper edge on making decisions and would save the project from any conflicts between the two companies.
  • The second issue is regarding the capital structure of the project. The proposed capital structure is highly on debt. To mitigate the risk of default, it is recommended that the company should go for an ideal debt to equity ratio which is to maintain the debt below 50 percent. As the debt level would decrease, the risk associated with it would also decrease and the project would become more attractive.

The third risk is related to the currency difference which is likely to occur because there are two companies involved in the project and one is foreign...................

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