CCIFP Construction Project Financing and Capital Structure 1

Question 1

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

Accepted Answer

Draw loan (construction draw)

Answer

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:

Accepted Answer

Total debt divided by total shareholders' equity

Answer

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)?

Accepted Answer

To manage short-term working capital and cash flow gaps

Answer

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:

Accepted Answer

Contract liabilities (billings in excess)

Answer

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?

Accepted Answer

Debt service coverage ratio (DSCR)

Answer

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

CCIFP - Certified Construction Industry Financial Professional Practice Test

CCIFP - Certified Construction Industry Financial Professional Practice Test

CCIFP Construction Project Financing and Capital Structure 1