Week 4 CaseDuring this week start working on Case II which is due at the end of Week 4. For this assignment prepare a memo in Word which answers the questions in the Chapter 5 Case S & S Air’s Mortgage on page 165 of the textbook. Use Excel to do any financial calculations. You will be graded oncorrect financial analysis proper use of technology and business-like presentation.CHAPTER CASES&S AIRS MORTGAGEMark Sexton and Todd Story the owners of S&S Air Inc. were impressed by the work Chris haddone on financial planning. Using Chriss analysis and looking at the demand for light aircraft they have decided that their existing fabrication equipment is sufficient but it is time to acquire abigger manufacturing facility. Mark and Todd have identified a suitable structure that is currentlyfor sale and they believe they can buy and refurbish it for about $35 million. Mark Todd andChris are now ready to meet with Christie Vaughan the loan officer for First United NationalBank. The meeting is to discuss the mortgage options available to the company to finance thenew facility.Christie begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equalmonthly installments. Because of the previous relationship between S&S Air and the bank therewould be no closing costs for the loan. Christie states that the APR of the loan would be 6.1percent. Todd asks if a shorter mortgage loan is available. Christie says that the bank does have a20-year mortgage available at the same APR.Mark decides to ask Christie about a smart loan he discussed with a mortgage broker when hewas refinancing his home loan. A smart loan works as follows: Every two weeks a mortgagepayment is made that is exactly one-half of the traditional monthly mortgage payment. Christieinforms him that the bank does have smart loans. The APR of the smart loan would be the sameas the APR of the traditional loan. Mark nods his head. He then states this is the best mortgageoption available to the company since it saves interest payments.Christie agrees with Mark but then suggests that a bullet loan or balloon payment would resultin the greatest interest savings. At Todds prompting she goes on to explain a bullet loan. Themonthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. Inthis case there would be a 5-year bullet. This would mean that the company would make themortgage payments for the traditional 30-year mortgage for the first five years but immediatelyafter the company makes the 60th payment the bullet payment would be due. The bulletpayment is the remaining principal of the loan. Chris then asks how the bullet payment iscalculated. Christie tells him that the remaining principal can be calculated using an amortizationtable but it is also the present value of the remaining 25 years of mortgage payments for the 30year mortgage.Todd has also heard of an interest-only loan and asks if this loan is available and what the termswould be. Christie says that the bank offers an interest-only loan with a term of 10 years and anAPR of 3.5 percent. She goes on to further explain the terms. The company would be responsiblefor making interest payments each month on the amount borrowed. No principal payments arerequired. At the end of the 10-year term the company would repay the $35 million. However thecompany can make principal payments at any time. The principal payments would work just likethose on a traditional mortgage. Principal payments would reduce the principal of the loan andreduce the interest due on the next payment.Mark and Todd are satisfied with Christies answers but they are still unsure of which loan theyshould choose. They have asked Chris to answer the following questions to help them choose thecorrect mortgage.QUESTIONS1. What are the monthly payments for a 30-year traditional mortgage? What are the payments fora 20-year traditional mortgage?2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. Howmuch of the first payment goes toward principal?3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditionalmortgage payments? Why is this shorter than the time needed to pay off the traditionalmortgage? How much interest would the company save?4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments onthe loan?5. What are the payments for the interest-only loan?6. Which mortgage is the best for the company? Are there any potential risks in this action?
