Finance and Mortgage Brooking Management Assignment

Added on - 21 Jul 2020

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Finance and MortgageBrooking Management
Table of ContentsSECTION 1......................................................................................................................................3TASK 1(b).......................................................................................................................................3TASK 2(b).......................................................................................................................................5TASK 3(b).......................................................................................................................................6SECTION 2......................................................................................................................................9TASK 4............................................................................................................................................9TASK 5..........................................................................................................................................12TASK 6..........................................................................................................................................15TASK 7..........................................................................................................................................20TASK 8..........................................................................................................................................22TASK 9..........................................................................................................................................26REFERENCES..............................................................................................................................31
SECTION 1TASK 1(b)Answer:Ray Murdoch and Steve brown are jointly running a business which is related tomanufacturing metal pallets. They are planning to purchase a sophisticated machine with the help oftechnical platform system CNC. It will help them to rapidly fabricate multiple components. As theyrequire loan assistance with respect to this. As a loan assistance executive there are variousquestions that can be asked from Ray and Steve before proving them any suggestion with respect tothe loan. Some questions are stated below:It is important to understand that for what purpose a person need loan for. It will help inunderstanding the basic requirement of loan. Moreover, it will be easy to provide assistanceas well.There are various loan options that are available in the market it is important to ask the clientthat what all option they find suitable for taking loan. It will help to assess that whether theyhave earlier taken any loan or not (Turan & Koskija, 2014).Another question that can be asked is upto what duration they will able to repay that amount.It is an important question to assess the time duration of the loan and suggest based on it thatwhether the client want long term loan or short term loan. Moreover, different loan optionscan be extended to Ray and Steve based on it.One must be aware of paying capacity of the client as well. It helps to assess that whether theclient will be able to payback the loan amount with interest or not.Moreover, what mortgage are they thinking for in lieu of the loan if loan mortgage issuggested to them?.What is the address of the current premises where the company is conducting its operations.What is the interest rate they are expecting out of the loan? It is an important question asdifferent sources of loans will be suggested on this basis.Is their profits are enough to bear the liability of loan where the payment of instalment isrequired to be made after a specific period.What are the income sources of Ray and Steve through the activities they are involved in ?What is the source of income of the spouse of Steve i.e. Kate's income and whether she iseligible to become one of the guarantors of the loan?If the income of Kate will support the high loan burden or not if Ray and Steve become3
defaulters?There are higher chances if Ray and Steve have any old relationship with the bank. Hence, itid to be asked that if they have any history of relationship with bank?Have they ever become the defaulter of the loan in previous years?If Ray and Steve have any other loan burden apart from the loan they are going to extendnow?If Ray and Steve will halve surplus income after fulfilling the requirement of instalment ofthe bank? It depicts healthy financial life of the parties.What is the profitability and liquidity state of Ray and Steve in order to understand theirfinancial ability?These questions will help in assessing that what kind of loan should be extended to Ray and Steve.Moreover, considering the answers of all the questions, assistance and suggestions will be providedbased on the same. Further, the loan assistance will help them in choosing one of the best alternativeavailable so that the purpose of loan can be fulfilled.Debt service is the requirement where cash is the main requirement to cover the principal andinterest amount of the loan amount for a specific period. It helps in assessing that whether thecompany will be able to make the payment in the specific period or not. If the company is notgenerating enough profits it means that it will be unable to service one debt.Total debt service ratio is calculated with the below formula:(Annual mortgage payments + Property taxes + Other debt payments ) / Gross family incomeBased on the given information it can be calculated for Ray and Steve as:Annual Mortgage payment of Ray =Home loan = 18000Annual mortgage payment of Steve =Home loan = 25200Car loan = 1350Creditors = 100000Total Annual mortgage payment plus debt payment = 144550Gross family income = 200000Hence, Debt service ratio = 144550 / 200000 = 0.72Therefore, Total debt service is 72%.4
Both Ray and Steve are on home loan which shows that they are already under one certain liabilitywith is required to be paid after a certain period. However, the profits their business have grown incomparison to that of previous year. It shows that the profits of the enterprise is on increasing phase.Moreover, the current assets amounting to $245,000 is already present with the organization whosepayment will be received in near future. They also have order of $1 million for next three monthswhich will help their gross profit margin to grow immensely.It shows that the financial condition of the company is convincing enough to extend loan andcompany will be able to payback loan after the specific period. Further, it reveals that the lendermust be comfortable enough extend the loan based on the financial position reflected by ray andSteve.There are various risks that are involved in taking loan with which Ray and Steve must be aware of.Some of them are mentioned below:They are taking loan for a machinery which can become obsolete after a specific period.Further, it requires up gradation after a specific period as well. It shows that making suchhuge investment can be risky for Ray and Steve and it may not prove to be fruitful enoughOnce the loan is extended by any party, Ray and Steve become liable to pay that amounteven if the entity is not generating any profit. It cannot be shifted to next period andtransferred to the other person as well.It would be difficult to extend the machinery on lease if it becomes obsolete over a period.Hence, making such a big investment may become a burden of the enterprise.It may affect the liquidity of the organization as a huge amount is required to be paid bythem as installant and interest after a specific period each year. Further, it may also affect theprofits as well. Ray and Steve should make this decision only of the situation in theenterprise is manageable and they will be able to cope up with the burden.TASK 2(b)Answer:REPORT5
ToRay and SteveDate: 6thSeptember, 2017As you have accepted all the terms and condition laid down by loan assistance executive. There arefew of the points that are required to be communicated to you.It is important for the managers that they keep themselves updated and find a source whose fundingis advantageous for the company.In the process of loan assignment, there are three partieswhich are involved. One in the loan receiver, that is, Ray and Steve under the name of theirtrade, Pallets – R – Us Pty Ltd. The second party is the loan agent who is not directlyassociated but is playing a key role in loan assistance. The third party is the one who isextending loan which can be bank, creditor or other financial institution. There is a step bystep process which is to be followed by Ray and Steve while taking loan from bank. The stepsare mentioned below:Preparing the budget and deciding that for how much amount the loan will be required by Ray andSteve. Under assumption of loan amount can lead to lack of financing and overestimation can bringquestion over credibility of business owner.Hence, the overall amount of loan decided to sanction is12240000 for the duration of 10 years.Another step is to take assistance from the loan assistant sothat the person can guide that what type of loan will be beneficial for them based on the purpose forwhich the loan has been taken.The loan is extended by the bank in the name of an entity only when enterprise is having soundfinancial statement. It gives surety to the bank that they give get their money bank. Therefore,financial statement are also demanded by the bank before giving loan to any party. Further, loanamount and percentage of interest is also decided based on the type of loan and prevailing interestrate of the market as well. For instance the interest rate percentage may be different for car loan,home loan, education loan etc. An interest rate of 12% have been decided by the bank to extend loanto Ray and SteveBank also assess that whether the reason stated by the enterprise is valid enough. Moreover, thereason may be good or bad for business loan. Since, Ray and Steve are taking loan for equipmentpurpose, it will be considered as a good reason for taking loan. Further, they use credit score tojudge the reliability on the owners of the business.Based on which, high credit score id given to6
Ray and Steve for creditUnderstanding the loan in appropriate manner is an important task that is required to be performedby Ray and Steve before getting the loan sanctioned. It will help to decide whether they want to takeloan from the bank or not.Moreover, the agent also discusses other sources of finance that can beopted by the entity.Ray and Steve must also have a mortgage that will be kept in the lieu of the loan. The mortgage'svalue must be equal or more than the amount the company is taking loan for. On the basis of whichthe bank decide that whether the loan will be provided to the enterprise or not.Hence, the decidedmortgage by ray and Steve is a building in which they are functioning their business.The key document while taking loan from the bank which are required to be submitted includes,personal identification proof which will be of Ray and Steve in this case, income details of the entitywhich they are running, credit and debit card statements, rental receipts, guarantor affidavit etc.Itwill help the bank to assess that whether the person and enterprise is authentic enough (Campbell,2012). Only after getting satisfied with all the documents, a loan document is issued stating that aloan of a specific amount and duration has been taken by the concerned person. It also addresses, allthe term and condition which have been issued by the bank on that particular loan. It also containsas annexure where repayment details are mentioned including installment period and amount as wellThis loan document is required to be sighed by the concerned person whose copy remains with theindividual or the entity and the original document is sent to the bank for further process. The finalloan certificate is issued to the company after all formalities which says that a loan amount has beenissued to a concerned party for specified period.However, it is important for the company to make prudent decision with respect to this. It will helpin assessing that whether the loan will prove to be fruitful or not. Moreover, other options offinancing can also be used where the company can get financing from relatives, family, friends etc.It can go for the loan whose interest rate is low and formalities are nominal (Woodward & Hall,2012). Different types of fees are also charged by the bank while issuing loan which includes loanprocessing fees, mortgage charges and other fees as well while issuing loan to a borrower.There are different types of fees that will be charged from the borrower by the bank which includes,loan assistance fees amounting to $1500, loan charges for $1500, fees of the loan assistanceexecutive, $2000, Preparation of loan papers, i.e. $1000 and mortgage fees amounting to $2000.7
TASK 3(b)Answer here:The loan can be taken by Ray and Steve from the bank where the prevailing interestrate id 12%. It is planning to take loan for the duration of 10 years. There are various assumptionsthat have been taken into consideration while calculating serviceability of the entity. Some of themare mentioned below:It does not take into account any fees which is related to loan.There is no change in the interest rate over the period of the loanLoan from the bank is issued at the rate of 12% where interest is calculated based oncompounding the same repayment frequency.It has been assumed that there are 26 fortnights, 52 weeks and 364 days in a year.No rounding offs the figures to the near decimal place.The loan has been taken for 10 yearsBased on the above assumptions it can be analysed that the loan amount will be calculated based onthe expenses required to be made by the entity or Ray and Steve. These expenses include, creditcard bills, car loan repayment, salary of Ray and Steve etc.Total debt service ratio is calculated with the below formula:(Annual mortgage payments + Property taxes + Other debt payments ) / Gross family incomeTotal Annual mortgage payment plus debt payment = 144550Gross family income = 200000Hence, Debt service ratio = 144550 / 200000 = 0.72Therefore, Total debt service is 72%.Based on the above figures the calculated serviceability is as under:Monthly repayment: $17,560.84Fortnightly repayment: $8,105Weekly repayment: $4052.508
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