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TFIN 601 Corporate Finance, Term 1, 2020

ASSIGNMENT 1

AUSTRALIAN NATIONAL INSTITUTE OF MANAGEMENT AND COMMERCE

(IMC)
Lecturer: Dr Biplob Chowdhury

Due Date: Week 6, Monday 20th April at 4.00pm.

Total Number of Questions: 6 questions. Students are required to work and submit the
assignment INDIVIDUALLY.

Course Weighting: 15% (This assignment is marked out of 100%)

Presentation Guidelines:
You are expected to write this assignment in Word or PDF format in a clear and logical manner and
should include a cover page available on the Top website at:
https://te.moodle.com.au/pluginfile.php/146823/mod_resource/content/1/Individual%20%20Gr
oup%20Assignment%20Coversheet.pdf
The report length is no more than 8 pages.
Assignments must be typed. Please, keep a copy of your assignment as well.
 You must use size 12 font Times New Roman, 1.5 line spacing, 1-inch margins and 1-inch
top/bottom margins. Tables can be single-spaced and the font size should not be smaller than
8pt; and tables must be numbered sequentially using Arabic numerals. Any illustrations used
must be very clear and easy to understand.
 Keep all steps of the calculation to full decimal places, and show the final answer to 2
decimal places.
 Marks will be awarded for the correctness of the steps and the final answer
 Compile your assignment (cover sheet, answers to questions) into one single pdf file, and then
submit it via the ‘Assessments’-‘Assignment 1’ tool on Moodle. Please note that your
assignment will be checked for plagiarism by Turnitin. A “Similarity Index” above 30% will
not be accepted.
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Assignment 1
KIWI YACHT’S MORTGAGE
Mark Kwan and Todd Jovannovich, the owner of Kiwi Yachts Ltd, were impressed by the work Chris
had done on financial planning. Using Chris’s analysis, and looking at the demand for yachts, they
have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger
manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale,
and they believe they can buy and refurbish it for about $35 million. Mark, Todd and Chris are now
ready to meet with Christie Vaughan, the loan officer for ACE Bank. The meeting is to discuss the
mortgage options available to the company to finance the new facility.
Christie begins the meeting by discussing a 30-year mortgage. The loan would repaid in equal monthly
installments. Because of the previous relationship between Kiwi Yachts and the bank, there would be
no establishment costs for the loan. Christie states that the APR of the loan would be 6.1%. Todd
asks if a shorter mortgage loan is available. Christie says that the bank does have a 20-year mortgage
available at the same APR.
Mark decides to ask Christie about a ‘smart loan’ he discussed with a mortgage broker when he was
refinancing his home loan. A smart loan works like this: every two weeks a mortgage payment is made
that is exactly one-half of the traditional monthly mortgage payment. Christie informs him that the
bank does have smart loans. The APR of the smart loan would be the same as the APR of the
traditional loan. Mark nodes his head. He then states this is the best mortgage option available to the
company since it saves interest payments.
Christie agrees with Mark, but then suggest that a bullet loan, or balloon payment, would result in the
greatest interest savings. At Todd’s prompting she goes on to explain a bullet loan. The monthly
payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there
would be a five-year bullet. This would mean that the company would make the mortgage payments
for the traditional 30-year mortgage for the first five years, but immediately after the company makes
the sixth payment, the bullet payment would be due. The bullet payment is the remaining principle of
the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining
principle can be calculated using an amortization table, but it is also the present value of the remaining
25 years of mortgage payments for the 30-year mortgage.
Todd has also heard of an interest-only loan and asks if this loan is available and what the terms would
be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of
3.5%. She goes on to further explain the terms. The company would be responsible of making interest
payments each month on the amount borrowed. No principle payments are required. At the end of
the 10-year term, the company would repay the $35 million principle. However, the company can
make principle payments at any time. The principle payments would work just like those on a
traditional mortgage. Principle payments would reduce the principle of the loan and reduce the interest
due on the next payment.
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Mark and Todd are satisfied with Christie’s answers, but they are still unsure of which loan they should
choose. They have asked Chris to answer the following questions to help them choose the correct
mortgage.
Questions (Rubrics are in brackets):
1. What are the monthly payments for 30-year traditional mortgage? What are the payments for a 20-year
traditional mortgage?
[10 marks]
2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the
first payment goes towards principle?
[20 marks]

3. How long would it take Kiwi Yachts to pay off the smart loan, assuming 30-year traditional mortgage payment?
Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the
company save?
[30 marks]

4. Assume Kiwi Yachts takes out a bullet loan under the terms described. What are the payment of the loan?
[10 marks]

5. What are the payments for the interest-only loan?

[10 marks]

6. Which mortgage is the best for the company? Are there any potential risk in this action?
[20 marks]