Case Study: S & S Air’s Mortgage

Table of Content

Background

S&S Air, owned by Mark Sexton and Todd Story, produces light aircraft. They were impressed by Chris’s financial planning work and utilized his analysis to determine that their current fabrication equipment was adequate but it was now necessary to obtain a larger manufacturing facility (Ross, Westerfield, & Jordan, 2011, p. 161).

Instead of constructing a new facility, they have discovered a suitable building that can be renovated for an approximate cost of $22 million. Mark and Todd recently met with Christie Vaughn, their loan officer, who provided them with details about different types of loans and payment plans.

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Satisfied with the options provided to them by the bank, Mark and Todd have requested Chris to answer multiple questions to assist them in selecting the appropriate mortgage (Ross, Westerfield, & Jordan, 2011, p. 161). The addendum contains the answers to these questions for their assessment, along with accompanying financial calculations. It is imperative to identify the key concerns in this situation: Mark and Todd must first determine if they have examined S & S Air’s financial statements before proceeding with this project.

The text by Chris lacks financial statements for the company, making the information provided limited. It is unclear how Chris evaluated the liquidity of the business, identified potential collateral for the loan, determined monthly payment feasibility, and predicted variations in monthly income and expenses. Although Chris likely included these details in the financial analysis presented to Mark and Todd, they can only be assumed at this stage. Additionally, it is necessary to determine if a thorough market analysis has been conducted.

It is assumed that Christie and First United National Bank have conducted their due diligence in this matter (Fraser and Ormiston, 2010, p. 181). According to the text, the bank is willing to waive closing costs on the loan due to their “previous” relationship. This suggests that the bank has confidence in the firm’s ability to repay, as no bank would provide a $20,000,000 loan with various options and forego closing costs otherwise.

Identify the critical thinking and decision making elements involved in reviewing the financial statements of S & S Air. Mark and Todd need to have confidence in the analysis. The bullet loan and interest-only loan both pose high risks for the company. Choosing either option would necessitate renegotiating terms with a lender. Losing market share would be disastrous for S & S Air, so Mark and Todd should evaluate the company’s performance and determine which areas have contributed to their success.

Mark and Todd want to assess whether the light aircraft market can generate sufficient cash flow to cover their chosen payment option. Their main focus should be on long-term financing options that provide a financially stable way to pay both principal and interest. By gaining a clear understanding of how and where their cash flows, they can then determine the most suitable loan option for S & S Air. Please evaluate potential measures that could have been implemented to produce a positive outcome, if needed:

Mark is displaying a strong concern regarding the interest rates associated with each loan option offered by the company. It is crucial for both Mark and Todd to evaluate not only the monthly payments but also the company’s ability to repay the loan. If S&S Air can manage to make a higher monthly payment, they will be able to reduce the principal debt more rapidly. Assuming that the bank does not impose any fees for early repayment, S&S Air could significantly save money and mitigate the risks linked to the balloon payment and interest-only loan options. By selecting the 20-year loan alternative and providing additional payments towards the principal balance to decrease the amount of interest owed, it would be feasible for S&S Air to fully repay a 20-year loan in 158 months.

The table below illustrates the option mentioned above: If Mark and Todd decide to go with this option, they will be able to budget for their mortgage payments each month. If they face difficulties, they have the option to skip the extra principal payment for any specific month. By choosing this option, S & S Air could save money and have more flexibility in their mortgage payments.

References

  1. Calculatoredge. (n. d. ). Retrieved November 3, 2012, from http://www. calculatoredge. com/finance/biweekly. htm
  2. Fraser, L. M. , & Ormiston, A. (201). Understanding financial statements (9th ed. ). Upper Saddle River, NJ: Prentice Hall.
  3. Ross, S. A. , Westerfield, R. W. , & Jordan, B. D. (Eds. ). (2011). Essentials of corporate finance (7th ed. , Rev. ). New York, NY: McGraw-Hill Irwin

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