Big Construction Projects Inc. (BCP) is considering building a toll road. A separate joint venture has been organized for this project. The project will be financed by government grants, equity from BCP and three other sponsors, and a loan from a lending syndicate. All four sponsors are parties to the joint venture. Which of the following best describes a disadvantage of using project financing for this project? a) BCP will have to include all the debt related to the project on its balance sheet. b) BCP's debt capacity will decrease. c) BCP will bear all the risk relating to the construction for the project being completed on time and within budget. d) The interest cost charged by the lender may be higher than the interest cost that BCP normally pays. Electric Co. (EC) is planning to build a new hydroelectric plant. The capital required for the project will come from EC and three other equity investors (sponsors), and banks will lend the remaining amount. The project will be set up as a separate legal entity and the project's free cash flows used to repay the interest and principal loan payments and provide the required return to the equity investors. In this case, the other three sponsors are customers who have committed to guaranteeing future purchases of electricity from this new plant for the first 10 years of operation at agreed-upon prices. Which of the following best describes an advantage of project financing for EC? a) Although project financing will reduce EC's debt capacity, the equity return on the project will be higher and so will compensate for this. b) The financing arrangements for project financing are quite simple and usually have lower overall fees for lawyers and investment bankers than other forms of financing. c) The financial risks of the project are shared with the sponsors. As a result, the banks will have as collateral for the project's loans not only the project's assets but also any unsecured assets of the sponsors' companies. d) As a result of the purchase agreements, the sponsors will share in the operating risks of the project, resulting in possibly lower borrowing costs. Gold Mining Inc. (GMI) is considering the construction of a mine in Peru. The Peruvian government (PG) has agreed to be a sponsor in this project. A syndicate of lenders will provide the rest of the funds required to construct the mine. The lenders require all sponsors to agree to a cash flow arrangement prior to finalizing the loan amount and terms. Which of the following best describes a cash flow arrangement related to project financing? a) GMI and PG will be required to purchase a specified amount of the gold that is produced by the mine on an annual basis. b) If there are insufficient funds to make the interest and principal obligations as they come due, GMI and PG will be required to pay the amounts not covered by the cash flows of the project. c) The lenders will be able to stop advancing any further amounts on the loan if construction does not proceed on schedule. d) GMI and PG will be required to ensure that the mine is producing a specified volume and quality of ore by a specified date. Oil Co. (OC) is reviewing the analysis of a project to build a new oil pipeline. OC has decided to use project financing. Equity will be contributed by OC and four other sponsors, and a syndicate of lenders will provide the debt. OC and other sponsors will sign purchase arrangements to guarantee 50% of the forecasted revenue from the pipeline. Which of the following best describes the risks that are reduced for the lender when the sponsors agree to a purchase arrangement? a) The risk that the project will not be completed on time and that operations will not commence on time. b) The risk that a product or service may not be saleable in the future at a price that ensures demand. c) The risk that there will be insufficient oil to transport through the pipeline in order to generate revenue. d) The risk that the project will generate insufficient cash flows to finance all the project's debt obligations