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

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Apr 3, 2024

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3/20/24, 4:32 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 5pm Points 20 Questions 20 Time Limit 60 Minutes Allowed Attempts 3 Instructions Attempt History Attempt Time Score LATEST Attempt 1 28 minutes 18 out of 20 Score for this attempt: 18 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
3/20/24, 4:32 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 10 at 7:28pm This attempt took 28 minutes. Question 1 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 2 1 / 1 pts Correct! Usually exhibit greater stability than earnings. Fluctuate more widely than earnings. Tend to be a lower percentage of earnings for mature firms. Are usually changed every year to reflect earnings changes. Dividend policy determines the portion of net income distributed to stockholders. Corporations normally try to maintain a stable level of dividends, even though profits may fluctuate considerably, because many stockholders buy stock with the expectation of receiving a certain dividend every year. Thus, management tends not to raise dividends if the payout cannot be sustained. The desire for stability has led theorists to propound the information content or signaling hypothesis: a change in dividend policy is a signal to the market regarding management's forecast of future earnings. This stability often results in a 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? Project finance experts agree that dividends
3/20/24, 4:32 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 stock that sells at a higher market price because stockholders perceive less risk in receiving their dividends. Question 3 1 / 1 pts Sinking fund. Correct! Call provision. Change in rating from Aa to Aaa. Conversion option. A bond issued at par may carry a lower coupon rate than other similar bonds in the market if it has features that make it more attractive to investors. For example, a sinking fund reduces default risk. Hence, investors may require a lower risk premium and be willing to accept a lower coupon rate. Other features attractive to investors include covenants in the bond indenture that restrict risky undertakings by the issuer and an option to convert the debt instruments to equity securities. The opportunity to profit from appreciation of the firm's stock justifies a lower coupon rate. An improvement in a bond's rating from Aa to Aaa (the highest possible) also justifies reduction in the risk premium and a lower coupon rate. However, a call provision is usually undesirable to investors. The issuer may take advantage of a decline in interest rates to recall the bond and stop paying interest before maturity. Question 4 1 / 1 pts Commission percentage an investment banker receives for underwriting a security issue. Discount investment bankers receive on securities they purchase from the issuing company. Correct! The bond’s feature that will not reduce the coupon rate on a bond issued at par is a In project finance capital markets, the concept "underwriting spread" is used to refer to the
3/20/24, 4:32 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 Difference between the price the investment banker pays for a new security issue and the price at which the securities are resold. Commission a broker receives for either buying or selling a security on behalf of an investor. An investment banker performs an underwriting or insurance function when it purchases an issue of securities and then resells them. The risk of price fluctuations during the distribution period is borne entirely by the investment banker. Investment banking is also an efficient vehicle for marketing the securities because investment bankers are specialists in such activities. The profit earned is the underwriting spread, or the difference between the purchase and resale prices of the securities (effectively, the wholesale and retail prices). Question 5 1 / 1 pts Income bonds that require interest payments only when earnings permit. Subordinated debt and rank behind convertible bonds. Correct! Bonds secured by the full faith and credit worthiness of the issuing firm. A form of lease financing similar to equipment trust certificates. Debentures are unsecured bonds. Although no assets are mortgaged as security for the bonds, debentures are secured by the full faith and credit of the issuing firm. Debentures are a general obligation of the borrower. Only companies with the best credit ratings can issue debentures because only the company's credit rating and reputation secure the bonds. Question 6 1 / 1 pts Correct! In project finance, the term debenture refers to In project finance capital markets, the primary market deals with the provision of new funds for capital investments through
3/20/24, 4:32 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 New issues of bond and stock securities. Exchanges of existing bond and stock securities. The sale of forward or future commodities contracts. New issues of bond and stock securities and exchanges of existing bond and stock securities. The primary market is the market for new stocks and bonds. In this market, wherein investment money flows directly to the issuer, securities are initially sold by investment bankers who purchase them from issuers and sell them through an underwriting group. Later transactions occur on securities exchanges or other markets. Question 7 1 / 1 pts All bonds in the issue mature on the same date. The yield to maturity is the same for all bonds in the issue. Correct! Investors can choose the maturity that suits their financial needs. The coupon rate on these bonds is adjusted to the maturity date. Serial bonds have staggered maturities; that is, they mature over a period (series) of years. Thus, investors can choose the maturity date that meets their investment needs. For example, an investor who will have a child starting college in 16 years can choose bonds that mature in 16 years. Question 8 0 / 1 pts I and IV. Some investors like serial bonds because If a $1 ,000 bond sells for $1,150, which of the following statements are true? I. The market rate of interest is greater than the coupon rate on the bond. II. The coupon rate on the bond is greater than the market rate of interest. Ill. The coupon rate and the market rate are equal. IV. The bond sells at a premium. V. The bond sells at a discount.
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