Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Accounting Basics Expert

Mark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chrisâ€TMs analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about $22 million. Mark, Todd, and Chris are now ready to meet with Christie Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the new facility.

Christie begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship be- tween S&S Air and the bank, there would be no closing costs for the loan. Christie states that the APR of the loan would be 6.1 percent. Todd asks if a shorter mort- gage loan is available. Christie says that the bank does have a 20-year mortgage available at the same APR.

Mark decides to ask Christie about a “smart loan” he discussed with a mortgage broker when he was re- financing his home loan. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Christie informs him that the bank does have smart loans. The APR of the smart loan would be the same as the APR of the traditional loan. Mark nods his head. He then states this is the best mortgage option available to the company since it saves interest payments.

Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Toddâ€TMs prompting, she goes on to describe a bullet loan. The monthly payments of a bullet loan would be find outd using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean that the company would make the mortgage payments for the traditional 30-year mort- gage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then asks how the bullet payment is find outd. Christie tells him that the remaining principal can be find outd using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage.

Todd has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further describe the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $22 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment.

Mark and Todd are satisfied with Christieâ€TMs answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following problems to help them choose the correct mortgage.

problemS

1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage?

2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the first payment goes toward principal?

3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save?

4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan?

5. What are the payments for the interest-only loan?

6. Which mortgage is the best for the company? Are there any potential risks in this action?

 

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M942579

Have any Question? 


Related Questions in Accounting Basics

Assignmentpigskin must decides how many footballs to

Assignment Pigskin must decides how many footballs to produce each month for 6-month planning horizon. Monthly demand must be satified on time. Set a model to determine the production plan for next 6 months which incurs ...

Sandy alomar corp prepare two schedules for inventory costs

Sandy Alomar Corp., Prepare two schedules for inventory costs under LIFO and FIFO You are vice-president of finance of Sandy Alomar Corp., a retail company that prepared 2 different schedules of gross margin for the firs ...

1 fair value determination of goodwill and calculating the

1) Fair value determination of goodwill and calculating the premium paid over market value in a merger: Using fair value accounting for goodwill, under FAS 141R, determine the amount of goodwill that "the acquiring compa ...

Accountingimagine that you are a consultant working on a

Accounting Imagine that you are a consultant working on a special project to help a company determine techniques that it can use in order to calculate the fair value of investments. From the e-activity, prepare a report ...

How do finance and accounting play a role in ethics and

How do finance and accounting play a role in ethics and sustainable positive social change? How might you use accounting or finance to support this role that you described above?

Examine the following book-value balance sheet for

Examine the following book-value balance sheet for University Products, Inc. What is the capital structure of the firm on the basis of market values? The preferred stock currently sells for $15 per share and the common s ...

Problem 1emma and laine form the equal el partnership emma

PROBLEM #1 Emma and Laine form the equal EL Partnership. Emma contributes cash of $100,000. Laine contributes property with an adjusted basis of $40,000 and a fair market value of $100,000. A. How much gain. If any, must ...

1 which of the following statements about equity is

1. Which of the following statements about equity is correct? A. If equity is negative, debt exceeds total assets B. If equity is negative, total assets exceed debt C. If equity is negative, equity exceeds assets D. If e ...

Assignmentair france-klm af a franco-dutch company prepares

Assignment Air France-KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF's financial statements and disclosure notes for the year ended Decemb ...

Essay question internal accountingone to two pages single

Essay Question Internal Accounting One to two pages (single spaced, Times New Roman 12 font) discussion. Clear and well-argued showing depth of knowledge and understanding of the concepts. Check grammar and spelling. Que ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro