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PART) Valuation of Future Cash Flows CHAPTER CASE S&S Air's Mortgage M C They 20 PC emme respect ark Sexton and Todd Story, the owners of S&S Air, Inc., IVI were impressed by the work Chris had done on finan cial planning. Using Chris's analysis, and looking at the de mand 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 identi- fied 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 we 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 refi- nancing his home loan. A smart loon works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage pay ment. 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 because 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 trad tional mortgage. In this case, there would be a 5-ye bullet. This means that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the com pany makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining prin cipal of the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining prind pal can be calculated using an amortization table, but is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage. Todd also has 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-ony loan with a term of 10 years and an APR of 3.5 perce She goes on to further explain the terms. The company would be responsible for making interest paymen each month on the amount borrowed. No principal pay ments are required. At the end of the 10-year term company would repay the $35 million. However, company can make principal payments at any p rincipal payments would work just like those on tional mortgage. Principal payments would reduce principal of the loan and reduce the interest next payment Mark and Todd are satisfied with Christie's on but they are still unsure of which loan choose. They have asked Christo answer the questions to help them choose the correct negative were not bond is So w om, lower comes pal payments at any time. The money and erest duen word tyd correct mortgage traditional mortgage? How er loans under QUESTIONS 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? 2. How long would it take for SES Ar to pay off the smart loon assuming 30 year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage much interest would the company saver 4. Assume SRS Air takes out a bullet lod the terms described. What are the pay the loan? 5. What are the payments for the interest 6. Which mortgage is the best for the Are there any potential risks in this ac ion of Fare Cash Flow PART ART) V CHAPTER CASE S&S Air's Mortgage greatest interest savings. At Todd's prompting, she A k Sexdon and Todd Story, the owners of S&SA, Inc. on to explain a bullet loan. The monthly payments IVIwere impressed by the work Chris had done on finan bullet loan would be calculated using a 30 ve cial planning Using Chris's analysis, and looking at the de tional mortgage. In this case, there would be as mand for light aircraft, they have decided that their existing bullet This means that the company would man fabrication equiment is sufficient, but it is time to acquire mortgage payments for the traditional 30 year mon a bigger manufacturing facility Mark and Todd have ident fed a suitable structure that is currently for sale, and they for the first five years, but immediately after the believe they can buy and refurbish it for about $35 million pany makes the 60th payment, the bullet par Mark Todd. and Chris are now ready to meet with Christie would be due. The bufet payment is the remaining Vaughan, the loan officer for First United National Bank cipol of the Chris then asks how the bullet pay The meeting is to discuss the mortgage options available folculated. Christie tells him that the remaining prin to the company to finance the new facility can be calculated using an amortization table, bu Christie begins the meeting by discussing a 30-ya is at the present value of the remaining 25 years mortgage. The loan would be repaid in equal mothy Mortgage payments for the 30-year mortgage Installments. Because of the previous relationship be. Todd also has heard of an interest-only loan and tween SRS Air and the bank, there would closing asks if this loan is available and what the terms would costs for the loan Christie states that the APR of the be. Christie says that the bank offers an interest loan would be 6.1 percent. Todd asics If a shorter mort loan with a term of 10 years and an APR of 3.5 percent gage loan is available. Christie says that the bank does She goes on to further explain the terms. The company have a 20-year mortgage available at the same APR. would be responsible for making interest payments Mark decides to ask Christie about a 'smart loan" he each month on the amount borrowed. No principal pay discussed with a mortgage broker when he was refl- ments are required. At the end of the 10-year term, the nancing his home loan. A smart loan works as follows: company would repay the $35 million. However, the Every two weeks a mortgage payment is made that is company can make principal payments at any time. The exactly one-half of the traditional monthly mortgage pay principal payments would work just like those on a trad ment. Christie informs him that the bank does have smart tional mortgage. Principal payments would reduce the loans. The APR of the smart loan would be the same as principal of the loan and reduce the interest due on the the APR of the traditional loan. Mark nods his head. He next payment. then states this is the best mortgage option available to the company because it saves interest payments. Mark and Todd are satisfied with Christie's answers, but they are still unsure of which loan they should Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the choose. They have asked Chris to answer the following questions to help them choose the correct mortgage. QUESTIONS G But in They 20 pc em respo nog wer abc 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 Ar 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? PART) Valuation of Future Cash Flows CHAPTER CASE S&S Air's Mortgage M C They 20 PC emme respect ark Sexton and Todd Story, the owners of S&S Air, Inc., IVI were impressed by the work Chris had done on finan cial planning. Using Chris's analysis, and looking at the de mand 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 identi- fied 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 we 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 refi- nancing his home loan. A smart loon works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage pay ment. 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 because 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 trad tional mortgage. In this case, there would be a 5-ye bullet. This means that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the com pany makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining prin cipal of the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining prind pal can be calculated using an amortization table, but is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage. Todd also has 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-ony loan with a term of 10 years and an APR of 3.5 perce She goes on to further explain the terms. The company would be responsible for making interest paymen each month on the amount borrowed. No principal pay ments are required. At the end of the 10-year term company would repay the $35 million. However, company can make principal payments at any p rincipal payments would work just like those on tional mortgage. Principal payments would reduce principal of the loan and reduce the interest next payment Mark and Todd are satisfied with Christie's on but they are still unsure of which loan choose. They have asked Christo answer the questions to help them choose the correct negative were not bond is So w om, lower comes pal payments at any time. The money and erest duen word tyd correct mortgage traditional mortgage? How er loans under QUESTIONS 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? 2. How long would it take for SES Ar to pay off the smart loon assuming 30 year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage much interest would the company saver 4. Assume SRS Air takes out a bullet lod the terms described. What are the pay the loan? 5. What are the payments for the interest 6. Which mortgage is the best for the Are there any potential risks in this ac ion of Fare Cash Flow PART ART) V CHAPTER CASE S&S Air's Mortgage greatest interest savings. At Todd's prompting, she A k Sexdon and Todd Story, the owners of S&SA, Inc. on to explain a bullet loan. The monthly payments IVIwere impressed by the work Chris had done on finan bullet loan would be calculated using a 30 ve cial planning Using Chris's analysis, and looking at the de tional mortgage. In this case, there would be as mand for light aircraft, they have decided that their existing bullet This means that the company would man fabrication equiment is sufficient, but it is time to acquire mortgage payments for the traditional 30 year mon a bigger manufacturing facility Mark and Todd have ident fed a suitable structure that is currently for sale, and they for the first five years, but immediately after the believe they can buy and refurbish it for about $35 million pany makes the 60th payment, the bullet par Mark Todd. and Chris are now ready to meet with Christie would be due. The bufet payment is the remaining Vaughan, the loan officer for First United National Bank cipol of the Chris then asks how the bullet pay The meeting is to discuss the mortgage options available folculated. Christie tells him that the remaining prin to the company to finance the new facility can be calculated using an amortization table, bu Christie begins the meeting by discussing a 30-ya is at the present value of the remaining 25 years mortgage. The loan would be repaid in equal mothy Mortgage payments for the 30-year mortgage Installments. Because of the previous relationship be. Todd also has heard of an interest-only loan and tween SRS Air and the bank, there would closing asks if this loan is available and what the terms would costs for the loan Christie states that the APR of the be. Christie says that the bank offers an interest loan would be 6.1 percent. Todd asics If a shorter mort loan with a term of 10 years and an APR of 3.5 percent gage loan is available. Christie says that the bank does She goes on to further explain the terms. The company have a 20-year mortgage available at the same APR. would be responsible for making interest payments Mark decides to ask Christie about a 'smart loan" he each month on the amount borrowed. No principal pay discussed with a mortgage broker when he was refl- ments are required. At the end of the 10-year term, the nancing his home loan. A smart loan works as follows: company would repay the $35 million. However, the Every two weeks a mortgage payment is made that is company can make principal payments at any time. The exactly one-half of the traditional monthly mortgage pay principal payments would work just like those on a trad ment. Christie informs him that the bank does have smart tional mortgage. Principal payments would reduce the loans. The APR of the smart loan would be the same as principal of the loan and reduce the interest due on the the APR of the traditional loan. Mark nods his head. He next payment. then states this is the best mortgage option available to the company because it saves interest payments. Mark and Todd are satisfied with Christie's answers, but they are still unsure of which loan they should Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the choose. They have asked Chris to answer the following questions to help them choose the correct mortgage. QUESTIONS G But in They 20 pc em respo nog wer abc 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 Ar 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