finance & mortgage
Case study B — Ray Murdoch and Steve Brown
Only complete Tasks 1–3 for one (1) of the case studies in Section 1
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. Whilst they have only been trading for 26 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 a loan 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 of production, 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.
Steve 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.
Ray worked with Steve 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. Ray is divorced.
Steve and Ray have provided the last two year’s financial accounts for the trading business, as well as interim accounts for the current financial year.
Applicant information
Client
Ray Murdoch
Steve Brown
Current address:
Unit 43, 25 High St Northville, <Your State> and has lived there for six years
23 Desmond Lane Northville, <Your State> and has lived there with Kate for seven years. They own property jointly.
Value
$750,000
$900,000
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
$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 @7.2% P & I Term 18 years
$350,000 @7.2% P & I Term 22 years
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 payment @ 9% payable 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
Dividend to private investor (flat profit fee) – years 1 and 2
$45,000
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 1b — Identify the clients’ complex broking needs
Prepare a list of questions that you would need to ask Ray and Steve about the proposed transaction.
Calculate the required servicing for the new debt, and the lender comfort surplus.
Outline the process and the risks (potential and real) of which Steve and Ray should be aware.
(800 words)
Student response to Task 1b
Answer here
Ray and Steve are entrepreneurs who have successfully run a metal pallet manufacturing business aset out to jointly purchase two apartments within a single building specifically for the purpose of renting them out. As their financial advisor on this case, I am fully responsible to find out each aspect about these two clients in a clear and detailed manner. This will include their financial obligations, position and personal details. Moreover, I will need to obtain some information regarding the property they seek to purchase and their previous experience when it comes to procuring properties as well as their loan commitments.
It will be necessary for me to evaluate their ability to meet their loan obligations on time so as to be certain if whether or not their proposition from a financial standpoint is feasible. This entire information can only have obtained by asking the both Steve and Tom specific questions. This will shed light on the degree of risk that is to be expected as well as their risk tolerance.
Below is a list of the all the questions related to the proposed investment that I would ask the two brothers:
ay
Assessor feedback:
Resubmission required?
No
Task 2b —Develop complex broking options
You are required to prepare a full report for Ray and Steve by outlining the process and the risks (potential and real) of which Ray and Steve should be aware.
In a suitable format, document the process that is required for Steve and Ray to obtain appropriate finance for their equipment and set up the loan.
In developing your report you should cover the following:
- The parties to the loan
- The product type you would recommend, including an appropriate term, interest rate and residual (if any)
- The framework and contents of the letter of credit requirements
- A list of the lenders that are able to lend
- The procedure to commence a loan
- The steps that will need to be in place
- The client responsibilities, so Steve and Ray fully understand the loan
- An outline as to the process and what the client needs to arrange
- The documentation needed to commence the borrowing
- The name in which the client will sign the contract to purchase
- A statement of those lenders who may also require a personal guarantee from the borrower’s spouse
- A summary of all fees and charges — including those for setup and those of the lender.
(800 words)
Student response to Task 2b
Answer here
Assessor feedback:
Resubmission required?
No
Task 3b — 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:
- serviceability calculations, including all borrowing facilities of Directors
- the proposed structure of the loan
- the loan amount
- the property style, size, use
- any other information that is relevant to the lenders requirements.
In additional to these requirements you should also include:
- your obligations under the NCCP (if any)
- maximum loan amount
- maximum loan terms
- any ATO consideration to be made
- your state legislation and OSR requirements
- your general advice restrictions
(800 words)
Note: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
Student response to Task 3b
Answer here
Assessor feedback:
Resubmission required?
No
Case Study C — Bill Smith and John Jones
Only complete Tasks 1–3 for one (1) of the case studies in Section 1
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 is rented and 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.
The shareholders of True Blue Pty Ltd are Bill Smith, John Jones and a private investor, Amanda Williams, who does not work in the business and has no involvement in its day-to-day operation. Each holds an equal one-third share in the company.
Bill and John have each been in real estate for approximately 15 years, focusing on residential sales and leasing. They have gained their work experience in the local area. A wealth of knowledge of the area, coupled with an ever-expanding client base, has resulted in sustained and solid growth for the business.
Details of the property
Sale price of the property is $950,000. (There is no GST requirement as it is being purchased as a going concern.)
A deposit of $95,000 has been paid and is being held in the trust account of the settlement agent/solicitor.
A cash contribution of $233,240 will be made from the general working account of the business.
Property purchase and loan to be in the name of a new entity — True Blue Pty Ltd as trustees for the Smith Jones Unit Trust. There are a total of 99 units in the trust and the unit holdings mirror the shareholding of the trading entity, True Blue Pty Ltd.
The property is situated at 100 Smith St, Yourtown, with contracts exchanged at today’s date and an anticipated settlement date of 90 days.
General observations about the property
The property is in good condition and is well located in the same street as the current rental premises. It is anticipated that the premises will meet the needs of the business for the next 10 years.
Summary of initial client fact find
Bill and John have provided the last two years’ financial accounts for the trading business, as well as interim accounts for 10 months of the current financial year.
True Blue Real Estate’s financial accounts
Year 1
Year 2
Net profit after tax
$92,000
$140,060
Current year projected – $175,000
Add back (rent)
$47,000
$49,142
Additional superannuation to director
$31,400
$34,539
Wages to partner one
$70,640
$70,640
Wages to partner two
$70,640
$70,640
Payment to private investor (fixed flat profit fee)
$45,000
$45,000
Applicant information — Bill Smith
Personal details
Address
26 Nowry Road, Yourtown, 1234
Date of birth
17 February 1958
Phone
7890 1234
Financial details
Gross income
$70,640
Owner occupied property valued at
$550,000
Outstanding debt on owner-occupied property
$210,000 @ 6.2% p.a. on a principal and interest basis
Credit card with limit $15,000
Outstanding debt — $5,000
Superannuation
$250,000
Motor vehicle valued at
$30,000 (nil debt)
Applicant information — John Jones
Personal details
Address
14 Mary Street, Yourtown, 1234
Date of birth
14 October 1970
Phone
0146 234 577
Financial details
Gross income
$70,640
Owner occupied property valued at
$750,000
Outstanding debt on owner occupied property
$300,000 @ 7.2% p.a. on a principal and interest basis
Credit card with limit $5,000
Outstanding debt — $1,000 cleared monthly, monthly
Superannuation
$200,000
Motor vehicle valued at
$45,000
Outstanding debt on motor vehicle
$15,000 (Assume five year term at 9% p.a. interest)
Business details
Cash in business account
$400,000
Other information
Applicants’ solicitor
Moffat and Co (contact is Maree Moffat)
16 Tatlor Street, Yourtown, 1234
Phone
7890 5678
Applicants’ accountant and registered office
Buckland Accountants (contact is Simon Williams)
28 Mary Street, Yourtown, 1234
Phone
2982 0987
Applicants’ banker
Westcoal Building Society, Yourtown, 1234
Notes:
- Assume for credit card debts, the minimum monthly commitment should be calculated at 3% of the credit limit.
- Each of the working directors has appropriate death, income and disability insurance in place.
- A sensitisation factor of 2% should be used when calculating financial commitments.
Assignment tasks (student to complete)
Task 1c — Identify the clients’ complex broking needs
Prepare a list of questions that you would need to ask Bill and John about their history, experience, business performance and the property purchase.
In preparing your list of questions you should ensure that you cover the following:
- The complex features of Bill’s and John’s situation and objectives.
- Potential risks and Bill’s and John’s tolerance of risk. In considering risk you should consider:
– How you would identify the risks and the criteria you used to evaluate these risks
– How you would assess their current exposure, the tools you would use in terms of probability, impact and the consequences.
(800 words)
Student response to Task 1c
Answer here
Assessor feedback:
Resubmission required?
No
Task 2c — Prepare complex broking options
You are required to prepare a full report for Bill and John by outlining the process and the risks (potential and real) of which Bill and John should be aware.
In a suitable format, document the process that is required for them purchase the new property and establishing the loan.
In developing your report you should cover the following:
- The parties to the loan
- The best physical set up with the lender — are they using their own property as cross security or the investment property?
- What name should the title be registered in given there is a Trust involved and advise what state you are basing your answer in
- The procedure to commence a loan for a property like this
- The steps that will need to be in place
- The client responsibilities (Bill and John should fully understand the loan that is proposed)
- An outline as to the lending process and what the client needs to arrange
- The documentation needed to commence the borrowing
- The name in which the client will sign the contract to purchase
- The state revenue requirements
- A statement as to whether guarantees from spouse’s or any other security will be required and why this is/is not the case
- The maximum LVR
- Suggest three (3) lenders to client’s that would be likely to consider this request
- A summary of fees and charges — including those for setup and those of the lender.
Note : You may make any reasonable assumptions necessary in order to complete the proposal.
(800 words)
Student response to Task 2c
Answer here
Assessor feedback:
Resubmission required?
No
Task 3c — Implement complex loan structures
Bill and John 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:
- serviceability calculations
- the proposed structure of the loan given the purchases is in the name of a new Unit Trust entity
- the loan amount
- the property style, size, use
- proposed security
- any other information that is relevant to the lenders requirements.
In additional to these requirements you should also include:
- your obligations under the NCCP (if any)
- maximum loan amount
- maximum loan terms
- any ATO consideration to be made
- your state legislation and OSR requirements
- restrictions on overseas purchase, if any
- your general advice restrictions
- property purchase requirements.
Notes:
- Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
- You will need to calculate and include your workings of the required servicing and debt service cover ratio for the new debt and existing borrowings of Directors. Comment on the DSCR comfort level for lender.
- You may make any reasonable assumptions necessary in order to complete the proposal.
Student response to Task 3c
Answer here
Assessor feedback:
Resubmission required?
No
Case study
B
—
Ray Murdoch and Steve
Brown
Only complete Tasks 1
–
3 for
one (1)
of the case studies
in Section 1
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 ve
ry 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 w
ell
–
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 databas
e that provides them with repeat
‘
business to business
’
dealings. Whilst they have only been trading for 2
6
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 a loan 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 l
east 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 wil
l require a letter of credit for the import of the machine.
Their business employs five people and, with the expected increase in bus
iness through the automation
of
production, they have forecast that they will need to recruit an additional two staff memb
ers in the
next 3
–
6 months to meet sales/production demands.
Steve
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 des
ign
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.
Ray
worked with
Steve
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.
Ray is
divorced.
Steve and Ray have provided the last two year
’
s financial accounts fo
r the trading business, as well as
interim accounts for the current financial year.
Case study B — Ray Murdoch and Steve Brown
Only complete Tasks 1–3 for one (1) of the case studies in Section 1
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. Whilst they have only been trading for 26 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 a loan 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
of production, 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.
Steve 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.
Ray worked with Steve 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. Ray is
divorced.
Steve and Ray have provided the last two year’s financial accounts for the trading business, as well as
interim accounts for the current financial year.
