Ray Murdoch and Steve Brown Case Study - Commercial Equipment Finance - Complex Broking Needs - Finance Assignment Help

Assignment Task:

Ray Murdoch and Steve Brown Case Study Finance Assignment Help

Section 1: Case study A — Ray Murdoch and Steve Brown – Commercial Equipment Finance

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 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. 

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 dependents. 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 the business with a loan $500,000 when the business commenced and he is being repaid interest plus a principal repayment of $30,000 per annum.  

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. 

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 (potential and 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 the client to inform you of any questions about the transaction and/or provide an instruction to proceed. 

Task 3a — Implement complex loan structures

Ray and Steve have accepted your recommendations and have given you the 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

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.
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.

Task 1b — 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 Company and Trust structure and benefits that will come to the Company from purchase of this property
•    the identification of potential risks in such a transaction and Bill’s and John’s tolerance of risk
•    the financial aspects of the transaction and current financial position of the business.

In addition to the list of questions, please also comment on any potential risks you identify (you are permitted to make assumptions here). In considering these risks you should consider:
    –    how you would identify the risks and the criteria you used to evaluate these risks
    –    how you would assess their current debt exposure; the tools you would use in terms of risk probability, impact and consequences.

Task 2b — 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, outline to the directors the options available to them and the process that will need to take place for them to complete the new property purchase and establish the loan. 

In developing your report you should cover the following:

1. the parties to the loan
2. what is the best loan structure for this transaction — provide Bill and John with options to use their own residential properties as cross security or use a cash contribution and use the property to be purchased as the security
3. your recommendation of the best option, including amount, security/collateral, term, repayments and potential interest rate 
4. name three (3) lenders that would consider and potentially approve this transaction, and advise the client of the product type, loan term, interest rate, ongoing fees, balloon payment (if applicable) and monthly repayment they offer
5. the procedure to commence the loan, including documentation Bill and John need to provide
6. the client responsibilities, so Bill and John fully understand the facility being proposed
7. outline the risks (potential and real) of which Bill and John should be made aware
8. the name in which the client will sign the contract to purchase and, given Trust involvement, in what name will it be registered (this varies state to state so please advise which state you are from)
9. a summary of fees and charges — including those for setup and those of the lender
10. a request for the client to inform you of any questions about the transaction and/or provide instruction for you to proceed
11. advise which relevant disclosures need to be made

Task 3b — Implement complex loan structures

Bill and John have accepted your recommendations and have given you the 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.

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