During this week, start working on Case II, which is due at the end of Week 4. For this assignment, prepare a memo in Word, which answers the questions in the Chapter 5 Case, S & S Air's Mortgage, on page 165 of the textbook. Use Excel to do any financial calculations. You will be graded on correct financial analysis, proper use of technology, and business-like presentation.

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Case II is due at the end of this week. For this assignment, prepare a memo in Word, which answers the questions in the Chapter 5 case, S & S Air's Mortgage, on page 165 of the textbook. Use Excel to do any financial calculations. You will be graded on correct financial analysis, proper use of technology, and business-like presentation. CHAPTER CASE S&S AIR'S MORTGAGE M ark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chris's 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 $35 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 between 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 mortgage 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 refinancing his home loan. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly onehalf 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 Todd's prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated 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 mortgage 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 calculated. Christie tells him that the remaining principal can be calculated 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 explain 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 $35 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 Christie's answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage. QUESTIONS Michael R. Trujillo May 27th 2015 Week 4 - Case 1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage? A 30-year traditional mortgage would consist of loan payments that are equal to 360 payments. In order to do this, we must use a present value formula; PVA = C[1-1/(1+r)^360/r] $35,000,000 = C[1-1/(1+0.061)^360/(0.061/12)] $35,000,000 = C[165.0179216] 165.0179216 165.0179216 C = $212,098.1749 C = $212,098.17 The monthly payments for a 30-year loan will be $212,098.17. PVA = C[1-1/(1+r)^240/r] $35,000,000 = C[1-1/(1+0.061)^240/(0.061/12)] $35,000,000 = C[138.4634858] 138.4634858 138.4634858 C = $252,774.2227 C = $252,774.22 The monthly payments for a 20-year loan will be $252,774.22. 2. Prepare an amortization table for the first six months of the traditional 30year mortgage. How much of the first payment goes toward principal? In order to do this, we will first need to split the $212,098.17 to determine what of it will be the interest payment and what will be the principal. This will allow us to deduct the principal from the balance each month. Of the very first payment, we see that $34,181.51 has been credited to the ending balance. By the 6 th month, the ending balance is at a mere $34,792,286.88. 3. How long would it take for S&S Air to pay off the smart loan assuming 30year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? As stated in the scenario above, the smart loan would allow Mark and Todd to make bi-weekly payments, which will save them interest payments in the end. First, we have to split the monthly payment of $212,098.17 into two giving us a bi-weekly payment of $106,049.09. To simplify how this will work when we look at 1 year; - 365 Days/7 Days a week = 52 Weeks a year. - 52 Weeks a year/2 payments per month = 26 Payments per year This is considerably important due to the fact that monthly payments only allow for 12 payments per year and although we may think bi-weekly payments simply means 12 * 2 = 24 payments per year, this is not true. The fact is that Mark and Todd will be able to make 2 additional payments per year (26 - 24 = 2), decreasing the time it will take to pay off the loan. To calculate exactly how much faster Mark and Todd can pay off their loan by using the smart loan, we can do the following math to find out the interest rate and amount of periods; Interest Rate = 6.1% * 14/365 Interest Rate = 0.2339726 Interest Rate = 0.234 T = ln (1 - ($819,000/$106,049.09))/ln (1.234) T = ln (-6.722838546)/ln (1.234) 4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan? The conditions of the bullet loan would allow for a 30-year traditional mortgage, resulting in a 5-year bullet. Since there are 12 periods in a year, this would result in 60 required payments, which then would leave Mark and Todd with the remaining principal balance due. The payments would be the same as the 30-year loan, the only difference is that at the end of the 60 th payment, the principal balance is due. (See Excel) = = = = $212,098.17(1-1/(1.061/12)^300)/(0.061/12) $212,098.17(1-1(0.088416)^300)/(0.061/12) $212,098.17(1-1(0.088416)^300)/(0.005083) $32,609,015.35 5. What are the payments for the interest-only loan? The terms of the interest only include paying the first 10 years worth of interest only payments, with not required principal payment. This would leave Mark and Todd with the remaining $35,000,000 due at the end of the 10th year. Just like the 30-year mortgage, we can calculate the interest for the first 10 years at 3.5% APR. = (0.035/12)($35,000,000) = (0.0029167)($35,000,000) = $102,083.33 The monthly interest payments that would be required are $102,083.33 each month, assuming $0 is applied towards the principal for the 120 months leading up to the final payment. At that time, the $35,000,000 balance would be due. This would bring Mark and Todd's loan to a total of $35,102,083.33. (See Excel Sheet) 6. Which mortgage is the best for the company? Are there any potential risks in this action? The most cost effective loan is obviously the interest only loan. The only risk with this is that Mark and Todd will have a $35,000,000 balance at the end of 10-years! If they have not managed to save up a substantial amount as a down payment, this will increase the risk if they cannot find an interest rate that is suitable to refinance the loan. Although the 30-year loan seems safe, it comes with a massive amount of interest payments over the span of 30 years. Another thing to take into consideration is that a lot could happen to the business in 30 years. The smart loan is comparable to the 30-year mortgage and the bullet loan is comparable to the interest only loan. Both yield slightly higher amounts of risk but saves money in the long run