Construction Project Financing and Capital Structure Flashcards

Which type of construction loan is disbursed in stages as project milestones are completed?

Answer: Draw loan (construction draw)

Construction draw loans release funds in tranches tied to verified project completion milestones, controlling lender risk.

The debt-to-equity ratio for a construction company is calculated as:

Answer: Total debt divided by total shareholders' equity

Debt-to-equity = total debt / total shareholders' equity, measuring financial leverage and creditor risk exposure.

What is the primary purpose of a construction company's line of credit (LOC)?

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.

In construction finance, 'overbilling' creates a balance sheet liability known as:

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).

Which financial metric do construction lenders most commonly use to assess a contractor's ability to service debt?

Answer: Debt service coverage ratio (DSCR)

DSCR (net operating income / total debt service) measures whether operating earnings sufficiently cover principal and interest payments.

A construction company's weighted average cost of capital (WACC) represents:

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.