Mini Case: Monica Jones Home Painting Business

Ms. Monica Jones was growing older. As she was the single mom of a high-school aged child, she felt she needed to get a job and support their (though small) family. She already had a full-time job at Marys Flowers & Finery as assistant manager. But they were barely scraping by, and they needed some spare money. Only, how to get another job? Most businesses wouldnt want to accept an aging, 30-40 year-old like her, no matter the amount of experience. Preference is normally given to younger candidates. But a Masters Degree in the Fine Arts had to count for something, right?

A few days later, she found herself spraying the roses with solution. The bugs had hit hard this year, and they would die if she didnt do anything about it. Smiling, she traced some of the liquid across the leaf, finger-painting some roses of her own. She remembered painting flowers with Gregs (Her son) friends at all of his birthday parties, and how the first thing he had ever drawn was a bumblebee. That was in the family album. Then, it hit her. Fine Arts. Visual Arts. Painting. Hadnt it always been her dream to become an artist, a professional painter, before she had become a mother? This was her chance to finally follow her dream! But how to go about it? Painting and the other Visual Arts had expanded into such a big industry, where could she claim her little corner?

There seemed to be a loose thread in her head. When she pulled on it, a memory came back and as she watched it, she had an idea.

The memory of speaking was the memory of Gregs 5th birthday, and all the kids went home with Rainbow-Fish canvases and loot bags. As the last kid was being picked up (Cindy, and her mother Sarah, Ms. Jones remembered), Ms. Sarah turned to her and said You teach so well! You should definitely open a home business! Yes, true. She was going to open a home business where parties could be hosted at home or in the clients, expanding into courses and maybe a website if necessary. At the time, they had laughed, but now the simple sentence gave Monica the courage to do what needed to be do-her train of thought crashed as she was poked by a rose thorn. Maybe what needed to be done could wait a few minutes. After all, she shouldnt be counting her eggs yet.

Later, inside, with an ice pack on her pinky, she realized that she had no knowledge of finance whatsoever, aside for the bare minimum on mortgages, income, taxes, and household costs. And even then, her house wasnt the sort of the house you started a home-based business in, it took no real estate experience for her to see that. It is a rental place with not enough room to start a painting business. So she went to pay a long-overdue visit to an expert: her brother, Aaron Walker. Aaron is a financial analyst currently working for Indus Bank. He was a straight-to- the-point sort of person, so they got to talking fairly quickly.

Aaron helped Monica choose her preferred area to look for the new home, a little ways across town. The prices werent too bad, and there were many primary schools nearby so she figured shed be getting a decent business with a very good growth opportunity. However, at this point the main concern was how much Monica can afford to buy the new home with the home business opportunity? Aaron had a rough idea about her sisters income, but he needed more information from Monica. Aaron: Well, I need to get some information about your current monthly income and expenses.

Monica: Hmm. Currently, I earn about $3500 per month after-tax; but I never kept track of my monthly expenses! Aaron: Fair enough. But I need to know about your monthly expense. Without that I will not be able to figure out your affordability level. Monica: I see. Well, currently I pay $800 as a monthly rent. Another $200 for electricity, water and gas bills. Aaron: What about grocery bills? Food expenses Monica: I dont know. Never kept a track of that! I think food and grocery bills will be around $800 per month. I also have a monthly mortgage payment for my car around $270 including monthly insurance. Aaron: What kind of income do you expect from your painting business per month? Monica: No sure yet. But I am confident that I will get at least 8 students per month and they will take four lessons each month. Other painting school charge $30 per class. I will charge $25 per lesson. Hopefully a lower rate and better care will help to get more students! Aaron: Hmm! Do you plan to hire anyone else for the business? Monica: Not really. I will just hire a cleaner each week to help me keep place tidy.

After explaining it all to him, Ms. Jones added: Aaron, Ive got a meeting with my real estate agent in two weeks. Can you find all the information by then? Aaron has been quite busy and wanted to help her sister. Sure, I will figure it out and get back to you Aaron replied.

Aaron found that current mortgage rates are quite low around 4% annually, although there are rumours that the rate may go up to 5% annually within next few months. He also knew that there are other miscellaneous expenses in any household which we often ignore. He wanted to add another $750 per month as miscellaneous expense (clothes etc.). Further, he thought that it would be better to keep aside another $200 as operating expense (e.g. cleaning, buying painting boards, paints) for the business. It is also expected that for the electricity and water bill would go up by $100 per month. Monica informed Aaron that she has some savings to pay for 20% down payment for the new house and can cover all other expenses (e.g. legal and registration cost) related to the purchase of new home. Aaron was not too sure about her sisters savings he thought that it will be more prudent to do the calculation with a 15% down payment scenario. However, Aaron realizes that banks interest rate charge goes up by 1% (annually) if the down payment drops from 20% to 15%.

Question(s):

Question 1: What is the maximum mortgage amount (total) Ms. Monica Jones can afford assuming a 25- year mortgage and a 20% down payment? (She will make monthly mortgage payment). Show detail financial modeling steps. The whole model should be interactive and formula should be linked.

Question 2 : Do the above calculations using 15% down payments. Also, develop scenarios for 8 students, 10 students and 12 students per month in the painting school. Be conservative with your interest rate prediction. Make other necessary assumptions.