Mary, the plant manager of Southern Oregon Injection Molding, Inc. (SOIM), is pondering an interesting offer made...

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Mary, the plant manager of SouthernOregon Injection Molding, Inc. (SOIM), is pondering an interestingoffer made by the president and majority shareholder, Kenny. Kennyrecently turned sixty and is planning a gradual retirement. None ofhis children are interested in taking over the business and arecurrently pursuing careers unrelated to the plastics industry, soKenny has decided to offer his controlling share to Mary.
SOIM began by manufacturing plasticlawn ornaments, including a colorful tropical bird that became amajor fad in the 1980s. Pleased and amused by the success of hisfanciful product, Kenny added rabbits, skunks, trolls, angels, andgarden fairies to the product line. Under Mary’s leadership, SOIMhas also become an important secondary supplier of plastic housingsfor speakers, cell phones, calculators, and similar products.
Marry started working at SOIM as acolor technician shortly after graduating from Southern OregonUniversity with a degree in chemical engineering. Within fiveyears, she became the plant manager, a position she has held forthe last eight years. Along the way, she has earned an MBA throughthe evening program at Southern Oregon University.
Because SOIM stock is publicly traded,we can confidently assign a value of $10,000,000 to Kenny’s shares.Kenny has stated that he is open to any reasonable plan to financethe purchase.
Questions
1. Mary could probably borrow themoney to purchase the shares outright because the shares wouldserve as collateral and dividends would cover a good part of theloan payments. The interest rate is 7%, and the lender willamortize the loan with a series of equal payments. What are theannual payments if the bank amortizes the loan over five, ten, ortwenty years?
2. Repeat Question 1, but assume thatMary makes payments at the beginning of each year.
3. Complete the following amortizationschedule for a $10,000,000 loan at 7% with five equal end-ofyearpayments.
4. Kenny has offered to finance thepurchase with a ten-year, interest-only loan. How much is Mary’sannual payment? Describe the pattern of payments over the tenyears.
5. Assume that Kenny accepts Mary’soffer to finance the purchase with a ten-year, interest-only loan.If Kenny can reinvest the interest payments at a rate of 7% peryear, how much money will he have at the end of the tenth year?

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3.6 Ratings (283 Votes)


1)	Term	5	10	20
	Rate	7%	7%	7%
	Loan	10,000,000.00	10,000,000.00	10,000,000.00
	Annual repayments	2,438,906.94	1,423,775.03	943,929.26

2)	Term	5	10	20
	Rate	7%	7%	7%
	Loan	10,000,000.00	10,000,000.00	10,000,000.00
	Annual repayments	$2,279,352.28	$1,330,630.87	$882,176.88

3)	Year	Loan at beginning	Repayment	Interest	Principal	Loan at end
	1	$10,000,000.00	$2,438,906.94	$700,000.00	$1,738,906.94	$8,261,093.06
	2	$8,261,093.06	$2,438,906.94	$578,276.51	$1,860,630.43	$6,400,462.63
	3	$6,400,462.63	$2,438,906.94	$448,032.38	$1,990,874.56	$4,409,588.06
	4	$4,409,588.06	$2,438,906.94	$308,671.16	$2,130,235.78	$2,279,352.28
	5	$2,279,352.28	$2,438,906.94	$159,554.66	$2,279,352.28	$0.00

4)	Annual payment is	700,000.00

	For 9 years , the annual payment is		700,000.00	and at end of 10 year, the payment is			10,700,000.00

5)	At end of tenth year, Mary would have		18,971,513.57	FV(7%,9,-700000,,)*1.07+10000000

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Transcribed Image Text

Mary, the plant manager of SouthernOregon Injection Molding, Inc. (SOIM), is pondering an interestingoffer made by the president and majority shareholder, Kenny. Kennyrecently turned sixty and is planning a gradual retirement. None ofhis children are interested in taking over the business and arecurrently pursuing careers unrelated to the plastics industry, soKenny has decided to offer his controlling share to Mary.SOIM began by manufacturing plasticlawn ornaments, including a colorful tropical bird that became amajor fad in the 1980s. Pleased and amused by the success of hisfanciful product, Kenny added rabbits, skunks, trolls, angels, andgarden fairies to the product line. Under Mary’s leadership, SOIMhas also become an important secondary supplier of plastic housingsfor speakers, cell phones, calculators, and similar products.Marry started working at SOIM as acolor technician shortly after graduating from Southern OregonUniversity with a degree in chemical engineering. Within fiveyears, she became the plant manager, a position she has held forthe last eight years. Along the way, she has earned an MBA throughthe evening program at Southern Oregon University.Because SOIM stock is publicly traded,we can confidently assign a value of $10,000,000 to Kenny’s shares.Kenny has stated that he is open to any reasonable plan to financethe purchase.Questions1. Mary could probably borrow themoney to purchase the shares outright because the shares wouldserve as collateral and dividends would cover a good part of theloan payments. The interest rate is 7%, and the lender willamortize the loan with a series of equal payments. What are theannual payments if the bank amortizes the loan over five, ten, ortwenty years?2. Repeat Question 1, but assume thatMary makes payments at the beginning of each year.3. Complete the following amortizationschedule for a $10,000,000 loan at 7% with five equal end-ofyearpayments.4. Kenny has offered to finance thepurchase with a ten-year, interest-only loan. How much is Mary’sannual payment? Describe the pattern of payments over the tenyears.5. Assume that Kenny accepts Mary’soffer to finance the purchase with a ten-year, interest-only loan.If Kenny can reinvest the interest payments at a rate of 7% peryear, how much money will he have at the end of the tenth year?