CCIFP Construction Project Financing and Capital Structure 1 — Questions and Answers
Question 1: Which type of construction loan is disbursed in stages as project milestones are completed?
- Term loan
- Draw loan (construction draw) (Correct answer)
- Revolving credit facility
- Mezzanine loan
Correct answer: Draw loan (construction draw)
Construction draw loans release funds in tranches tied to verified project completion milestones, controlling lender risk.
Question 2: The debt-to-equity ratio for a construction company is calculated as:
- Total liabilities divided by total assets
- Total debt divided by total shareholders' equity (Correct answer)
- Long-term debt divided by net income
- Current liabilities divided by current assets
Correct answer: Total debt divided by total shareholders' equity
Debt-to-equity = total debt / total shareholders' equity, measuring financial leverage and creditor risk exposure.
Question 3: What is the primary purpose of a construction company's line of credit (LOC)?
- To finance long-term equipment purchases
- To manage short-term working capital and cash flow gaps (Correct answer)
- To fund owner equity distributions
- To refinance long-term debt
Correct answer: To manage short-term working capital and cash flow gaps
A line of credit provides flexible short-term borrowing to bridge timing differences between project costs and contract billings.
Question 4: In construction finance, 'overbilling' creates a balance sheet liability known as:
- Contract assets
- Retainage receivable
- Contract liabilities (billings in excess) (Correct answer)
- Deferred revenue from operations
Correct answer: Contract liabilities (billings in excess)
When a contractor bills more than the percentage of completion warrants, the excess is a contract liability (billings in excess of costs and estimated earnings).
Question 5: Which financial metric do construction lenders most commonly use to assess a contractor's ability to service debt?
- Gross profit margin
- Debt service coverage ratio (DSCR) (Correct answer)
- Return on equity
- Working capital turnover
Correct answer: Debt service coverage ratio (DSCR)
DSCR (net operating income / total debt service) measures whether operating earnings sufficiently cover principal and interest payments.
Question 6: A construction company's weighted average cost of capital (WACC) represents:
- The average interest rate on all outstanding loans
- The blended required return across all sources of financing (Correct answer)
- The cost of equity financing only
- The prime rate plus a risk premium
Correct answer: The blended required return across all sources of financing
WACC weights the cost of each financing source (debt, equity) by its proportion of total capital, representing the minimum return needed to create value.
CCIFP Construction Project Financing and Capital Structure 1
Which type of construction loan is disbursed in stages as project milestones are completed?