Background
You have just met with Ray Murdoch and Steve Brown, referred to you by another commercial client.
Ray Murdoch and Steve Brown jointly own a successful and growing business that manufactures metal pallets. They trade under the name Pallets-R-Us Pty Ltd. The pallets are manufactured using material that is lightweight and durable. There has also been a very structured approach to the research and development for the engineering and design of the pallets. The pallets are used in all industry sectors. Part of the process involves powder coating the finished product, which is currently outsourced to a local well-established contractor.
It is critical that Ray and Steve’s product meets market needs. They need to maintain sustainable production and operating costs if they are to forecast their sales and cost of sales.
They have a well-established client database that provides them with repeat ‘business-to-business’ dealings. While they have only been trading for 30 months, they have a solid business plan with written supply contracts with three major business clients and several smaller business clients.
Ray and Steve now require finance to assist them with the purchase of a sophisticated machine, using the technical platform system CNC. This machine can be programmed to rapidly fabricate multiple components. The machine has an expected commercial lifespan of at least 15 years with operating software to be updated every three years. This software and upgrades is included in the purchase price of $800,000.They need to import the machine from the US. Initial enquiries with the US supplier have indicated that they will require a letter of credit for the import of the machine.
Their business employs five people and, with the expected increase in business through the automation ofproduction, they have forecast that they will need to recruit an additional two staff members in the next 3–6 months to meet sales/production demands.
Ray has been in the metal fabrication field all his working life. He has an MBA and understands financial management. He also has solid engineering skills and developed the majority of the design works for the business. He is married and has no dependants. His wife is a school teacher and she will be retiring at the end of the year.
Steve worked with Ray at ‘Protech’ as a foreman. His skills are in production and managing project/job flow. He has high level technical skills and can complete works to specification at a high standard.
Steve and Ray have provided the last two years financial accounts for the trading business, as well as interim accounts for the current financial year. Ray’s brother provided business with a loan $500,000 when the business commenced and he is being repaid interest plus a principle repayment of $30,000 per annum.
Applicant information Client Ray Murdoch Steve Brown Current address: Unit 43, 25 High St Northville, and has lived there for six years 23 Desmond Lane Northville, and has lived there with Kate for seven years. They own property jointly. Home phone: 9001 2121 9002 1212 Status Ray is divorced with no dependent age children Steve is married with no dependents Employment Self-employed business owner Self-employed business owner Income $100,000 per annum $100,000 Property value $750,000 $900,000 Cash at bank $12,500 $9,600 Contents $100,000 $85,000 Superannuation $250,000 Steve $350,000, Kate $60,000 Motor vehicle $40,000 $55,000 Home loan $250,000 repayments $2,068p.m., P & I, 18 years remaining $350,000 repayments $2,645 p.m., P & I, 22 years remaining Credit card $25,000 limit with debt of $15,000 payment @3% $10,000 limit with debt of $3,000 payment @3% Car loan $0 $15,000 repayment $746p.m., remaining term 4 years The business Year 1 net profit after tax $200,000 Year 2 net profit after tax $220,000 Current year interim profit (10 months trading) $200,000 Wages to partner 1 – years 1 and 2 $100,000 Wages to partner 2 – years 1 and 2 $100,000 Principal repayment to Ray’s brother repaid annually $30,000 Key balance sheet items Cash $25,000 Debtors $220,000 Creditors $100,000 Notes The business currently meets all creditor payments at 30-day terms.
Debtor collection has been solid. They invoice an upfront payment of 50% of the sale price, which assists in funding their production.
They have orders of $1m over the next 3 months and have made an increase in their gross profit margin.
The orders are from several clients, so their debtors will be well spread. Task 1a — Identify the clients’ complex broking needs
Prepare a list of questions that you would need to ask Ray and Steve about their history, experience, business performance and the intended equipment purchase.
In preparing your list of questions you should ensure that you cover the following:
• the complex features in importing and purchasing this equipment and benefits that will come to the Company from such purchase
• the identification of potential risks in such a transaction and Ray’s and Steve’s tolerance of risk
• the financial aspects of the transaction and current financial position of the business.
(800 words)
Student response to Task 1a Response
Assessor feedback for Task 1a: Resubmission required? No
Task 2a —Develop complex broking options
You are required to prepare a full report addressed to Ray and Steve outlining available loan options; the process and the risks (potentialand real) of which they should be made aware.
In a suitable report format you should cover the following:
1. the parties to the loan
2. outline the type of letter of credit (LC) likely to be used, the parties to the LC and the high-level steps involved in setting up and establishing LC to enable import of the equipment
3. the product options that are available to finance an equipment purchase once it has arrived in Australia
4. your recommendation of best product option, including amount, security/collateral, term, potential interest rate and residual value (if any)
5. name three (3) lenders that would consider and potentially approve this transaction and advise Ray and Steve about product type, loan term, interest rate, balloon payment (if applicable) and monthly repayment they offer
6. the procedure to commence the import of the equipment and the loan, including documentation Ray and Steve need to provide
7. the client responsibilities, so Steve and Ray fully understand the facility being proposed
8. outline the risks (potential and real) of which Ray and Steve should be made aware
9. whether personal guarantee will be required from the Director’s spouse
10. a summary of all fees and charges — including those for setup and those of the lender
11. advise which relevant disclosures need to be made
12. a request for client to inform you of any questions about the transaction and/or provide an instruction to proceed.
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a report to your clients, demonstrating your professional writing skill — not simply commenting on each of the points detailed above.
The use of tables in the report to set out some of the numeric information may be of benefit.
Student response to Task 2a Response
Assessor feedback for Task 2a: Resubmission required? No
Task 3a — Implement complex loan structures
Ray and Steve have accepted your recommendations and have given you authority to proceed with their application.
As part of implementing their loan application you are required to prepare a formal written loan submission to the lender for pre-approval. Your loan submission must include the following:
• details of borrower, guarantors and all contact details
• borrowers background
• an overview of the proposal — what the finance is for
• the proposed structure of the facility being recommended — product type, deposit amount (if required), loan amount, term, interest rate and residual value (if any)
• full details of the security/collateral that is to be provided
• serviceability calculations including Debt Service Cover Ratio (DSCR) calculations, including all personal borrowing facilities of the directors
• provide a ‘funds-to-complete’ table including statutory costs and any relevant fees
• highlight the relevant risks — industry, business, transactional — and how they are mitigated
• any other information that is relevant to assist the lender provide an approval
• your comments and recommendations
• list attachments
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a formal submission to the lender; not simply commenting on each of the points detailed above.
The use of tables in the report, to set out some of the numeric information, may be of benefit.
Student response to Task 3a Response
Assessor feedback for Task 3a: Resubmission required? No Assessor feedback: [insert feedback] Date assessed: Click here to enter a date Does the student need to resubmit? No Questions that need to be resubmitted First submission Not yet demonstrated Resubmission Not applicable To pass this subject, you will need to be assessed as DEMONSTRATED for either your first submission or your resubmission.
Section 2: Case Study B — Bill Smith and John Jones – Commercial Premises Finance
Background
You are meeting with prospective clients, Bill Smith and John Jones. They have been referred to you by their accounting firm, Buckland Accountants.
The prospective clients need assistance with the acquisition of owner-occupied premises to replace their current business premises, which they rent and is becoming too small for their growing business.
True Blue Pty Ltd trades as True Blue Real Estate and was purchased as an existing real estate business three years ago. Bill Smith and John Jones are the directors.