Case Study: S & S Air’s Mortgage
3001-3 FNCE Financial Management
October 9th, 2012
Case Study: S & S Air’s Mortgage
S&S Air manufactures light aircraft. The owners of S & S Air, Mark Sexton and Todd Story, were impressed by the work Chris had done on financial planning. By using Chris’s analysis and looking at the demand for light aircraft, they decided that their existing fabrication equipment was sufficient, but that it was time to acquire a bigger manufacturing facility (Ross, Westerfield, & Jordan, 2011, p. 161). Rather than building a new facility they have found a suitable building for renovation at an estimated expense of $22 million dollars. Mark and Todd have met with their loan officer, Christie Vaughn, who has given them information on various types of loan and payment structures. Here is a table showing those options: TermRateFrequencyPayment Amount
30 Years6.10%Monthly $ 133,318.85
30 Years6.10%Bi-Weekly $ 66,659.43
20 Years6.10%Monthly $ 158,886.65
5 Year Balloon6.10%Monthly $ 133,318.85
10 Year IO3.50%Monthly $ 203,630.37
Satisfied with the options provided to them by the bank, Mark and Todd have asked Chris to answer several questions to help them choose the correct mortgage (Ross, Westerfield, & Jordan, 2011, p. 161). The answers to these questions are provided in the addendum for review as well as the accompanying financial computations.
Identify what you believe to be the key issues:
There are several issues that Mark and Todd need to consider before moving forward with this project. The first issue that needs to be addressed is whether or not Mark and Todd have reviewed S & S Air’s financial statements. The information provided by Chris in the text is limited, as no financial statements for the company have been provided. Chris’s ability to assess the liquidity of the business, identify possible collateral for the loan, form an accurate basis for comfortable monthly payments, and anticipate changes in monthly income and expenses are all a bit of a mystery. Chris has likely provided this to Mark and Todd in the financial analysis he performed, but the facts can only be assumed at this point. The second issue that needs to be addressed is whether or not a proper market analysis has been completed. We must assume that Christie and First United National Bank have completed their due diligence on this matter. Fraser and Ormiston (2010, p. 181) state “A creditor is ultimately concerned with the ability of an existing or prospective borrower to make interest and principal payments on borrowed funds.” The text states that the bank is willing to forgo closing cost on the loan because of the “previous” relationship. One could argue that no bank is going to provide $20,000,000 with a variety of loan options and forgo closing costs if they do not have confidence in the ability of a firm to pay. Identify the elements of critical thinking and decision making that came into play:
Concerning the first key issue of reviewing the financial statements, Mark and Todd must feel confident in what they see in the analysis. The bullet loan and interest-only loan present high risk options for S & S Air. Either option will require S& S to go back and negotiate terms with a lender. If S & S Air loses market share, it could be devastating for the business. Mark and Todd should be looking at how well their firm has performed and what areas of the business have contributed to their success. Mark and Todd need to determine if the light aircraft market will provide enough cash flow to offset the payment option they choose. Mark and Todd should focus on the long-term financing options that allow them to pay principal and interest in a way that keeps their company financially stable. Once they understand where and how their cash flows, they can make a decision on what loan option...