Accounting and Finance – Commercial Equipment Finance – Ray Murdoch and Steve Brown Case Study Assessment Answer

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Accounting and Finance Commercial Equipment Assessment Answer
Assignment Task:
Task 1— 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 2 —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:

the parties to the loan

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

the product options that are available to finance an equipment purchase once it has arrived in Australia

your recommendation of best product option, including amount, security/collateral, term, potential interest rate and residual value (if any)

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

the procedure to commence the import of the equipment and the loan, including documentation Ray and Steve need to provide

the client responsibilities, so Steve and Ray fully understand the facility being proposed

outline the risks (potential and real) of which Ray and Steve should be made aware

whether personal guarantee will be required from the Director’s spouse

a summary of all fees and charges — including those for setup and those of the lender

advise which relevant disclosures need to be made

a request for client to inform you of any questions about the transaction and/or provide an instruction to proceed.

Task 3— 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:

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

Case Study — Bill Smith and John Jones – Commercial Premises Finance
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.

 Case study — Ray Murdoch and Steve Brown – Commercial Equipment Finance

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