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:

1. The parties to the loan

2. The product type you would recommend, including an appropriate term, interest rate and residual (if any)

3. The framework and contents of the letter of credit requirements

4. A list of the lenders that are able to lend

5. The procedure to commence a loan

6. The steps that will need to be in place

7. The client responsibilities, so Steve and Ray fully understand the loan

8. An outline as to the process and what the client needs to arrange

9. The documentation needed to commence the borrowing

10. The name in which the client will sign the contract to purchase

11. A statement of those lenders who may also require a personal guarantee from the borrower’s spouse

12. 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.

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