Week 3_ Test Your Knowledge (TYK)_ PJM 6075 WINTER 2024 PROJECT FINANCE 20736_21621

.pdf

School

Northeastern University *

*We aren’t endorsed by this school

Course

6075

Subject

Finance

Date

Apr 3, 2024

Type

pdf

Pages

12

Uploaded by BaronCapybara7708

Report
3/4/24, 6:13 PM Week 3: Test Your Knowledge (TYK): PJM 6075 WINTER 2024 PROJECT FINANCE 20736/21621 https://northeastern.instructure.com/courses/165089/quizzes/582941 1/12 Week 3: Test Your Knowledge (TYK) Due Mar 10 at 8pm Points 20 Questions 20 Time Limit 60 Minutes Allowed Attempts 3 Instructions Attempt History Attempt Time Score LATEST Attempt 1 18 minutes 16 out of 20 Score for this attempt: 16 out of 20 This practice test covers week 3 course materials, which include the project ±nance markets, capital structure and cost of capital. Each answer key contains detailed explanations to help you master the course materials. Take notes as you learn, because the ±nal exam will cover week 1-week 6 course materials. You can take this practice test up to three times. Test Parameters Logistics: Online Number of Questions: 20 Duration: 60 minutes Possible points: 20 points Type of test: Open Book Questions Type: Fill in the blank, multiple choice, multiple answer, and matching Question Delivery: One question at a time Multiple Attempts: You can take this test up to three times Force Completion: Once started, this Test must be completed in one sitting. Due date: Sunday of the Third week of the course Learning Connection: This Test Your Knowledge (TYK) practice test is directly linked to the following key learning outcomes from the course syllabus: Examine the capital structure of a project organization Use real world case studies to apply project ±nance theories by Calculating the cost of capital of a project company Determining the optimal capital structure that maximizes the value of a project company Analyzing the factors that impact a project company's dividend policy Take the Quiz Again
3/4/24, 6:13 PM Week 3: Test Your Knowledge (TYK): PJM 6075 WINTER 2024 PROJECT FINANCE 20736/21621 https://northeastern.instructure.com/courses/165089/quizzes/582941 2/12 Submitted Mar 4 at 9:13pm This attempt took 18 minutes. Question 1 1 / 1 pts The bondholder is guaranteed an income over the life of the security. By promising a return to the bondholder, an income bond is junior to preferred and common stock. Income bonds are junior to subordinated debt but senior to preferred and common stock. Correct! Income bonds pay interest only if the issuing company has earned the interest. An income bond is one that pays interest only if the issuing company has earned the interest, although the principal must still be paid on the due date. Such bonds are riskier than normal bonds. Question 2 1 / 1 pts Market interest rates have increased. Additional debt can be issued more cheaply than the original debt. There should be no difference; cost of debt is the same as the bonds' market yield. Correct! Interest is deductible for tax purposes. Because interest is deductible for tax purposes, the actual cost of debt capital is the net effect of the interest payment and the offsetting tax deduction. The actual cost of debt equals the interest rate times (1 -the marginal tax rate). Thus, if a firm with a 9% market rate is in a 40% tax bracket, the net cost of the debt capital is 5.4% [9% x (1 - .4)]. Question 3 1 / 1 pts The main difference between income bonds and other bonds is that Chenco is a project company incorporated in Hundred Acre Wood, California. If Chenco's bonds are currently yielding 9% in the marketplace, why is Chenco's cost of debt actually lower?
3/4/24, 6:13 PM Week 3: Test Your Knowledge (TYK): PJM 6075 WINTER 2024 PROJECT FINANCE 20736/21621 https://northeastern.instructure.com/courses/165089/quizzes/582941 3/12 Bank lender Bondholder Correct! Shareholder Non-bank lender The term lender is used to mean either a bank lender, bondholder, non-bank lender or debt fund. The term shareholder is used to mean the owner of shares in a company. Although the financial and legal structures and procedures are different in the bank and the non-bank private-sector project-finance debt market, the criteria under which debt is raised in each of these markets are much the same. Question 4 1 / 1 pts $22.61 $46.00 Correct! $50.00 $53.00 The conversion price is the assumed price of the stock, which was set at the time the bonds were issued. Dividing the $1 ,000 face value by the 20 shares results in a conversion price of $50. Answer (A) is incorrect because it is the ratio of stock price to bond price, not the conversion price. Question 5 1 / 1 pts The term lender is typically used to refer to all of the following, except Chenco's $1 ,000 par value convertible debentures are selling at $1,060 when its stock is selling for $46.00 per share. What is the conversion price if the conversion ratio is 20? A bond issued by a project company is aimed mainly at
3/4/24, 6:13 PM Week 3: Test Your Knowledge (TYK): PJM 6075 WINTER 2024 PROJECT FINANCE 20736/21621 https://northeastern.instructure.com/courses/165089/quizzes/582941 4/12 The banking market. Correct! The non-banking markets. The equity market. The international trading market. A bond issued by a project company is basically similar to a loan from the borrower’s point of view, but it is aimed mainly at the non-banking market and takes the form of a tradable debt instrument, originally evidenced by a paper certificate, but now generally superseded by electronic registration. Question 6 1 / 1 pts Correct! Voting rights in corporate elections. Dividend payments that are not tax deductible by the company. No principal repayments. A superior claim to common stock equity in the case of liquidation. Dividends on cumulative preferred stock accrue until declared; that is, the book value of the preferred stock increases by the amount of any undeclared dividends. Participating preferred stock participates with common shareholders in excess earnings of the company. In other words, 10% participating preferred stock might pay a dividend each year greater than 10% when the corporation is extremely profitable. Therefore, nonparticipating preferred stock will receive no more than is stated on the face of the stock. Preferred shareholders rarely have voting rights. Voting rights are exchanged for preferences regarding dividends and liquidation of assets. Question 7 1 / 1 pts Cumulative preferred stock (non-participating, 10%) in Chenco LTD that meets its dividend obligations has all of the following characteristics, except The market value of a share of stock is $60, and the market value of one right prior to the ex-rights date is $2.00 after the offering is announced but while the stock is still selling rights-on. The offer to the
3/4/24, 6:13 PM Week 3: Test Your Knowledge (TYK): PJM 6075 WINTER 2024 PROJECT FINANCE 20736/21621 https://northeastern.instructure.com/courses/165089/quizzes/582941 5/12 Correct! Does not receive any additional benefit from the rights offering. Receives an additional benefit from the rights offering. Merely receives a return of capital. Should redeem the right and purchase the stock before the ex-rights date. The formula for determining the value of one stock right when the price of the stock is rights-on is as follows: R on = (P on – S)/(N + 1) Plugging the amounts into the formula for determining the value of one stock right produces a theoretical value of $2.50 per right, which leaves a theoretical value of $47.50 for the stock: ($60- $50) ÷ (3 + 1) = $2.50. However, if the stock declines to $57.50 when the right is worth only $2, the original investor is worse off than before the rights issuance; i.e., the investor would have only $59.50 worth of investments. Hence, the original shareholder receives no benefit from the issuance of the rights. Question 8 1 / 1 pts Correct! Bonds guaranteed by insurance companies or commercial banks. Bonds gifted to friends and family birthdays and other special occasions. Bonds that are issued by all industry sectors, including non-profit and government agencies. Bonds guaranteed by the issuer. Wrapped bonds are bonds guaranteed by insurance companies or commercial banks (primarily from European and Japanese banks rather than U.S. banks). When bonds are wrapped or guaranteed, bondholders need to pay little attention to the background or risks of the borrower or (if relevant) the project itself—at least theoretically—and could rely on the credit rating of the insurance company itself. shareholder is that it will take three rights to buy an additional share of stock at a subscription price of $50 per share. If the theoretical value of the stock when it goes ex-rights is $57.50, then the shareholder Wrapped bonds are
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help