Question

In: Finance

The CEO of Kuehner Development Company has just come from a meeting with his marketing staff...

The CEO of Kuehner Development Company has just come from a meeting with his marketing staff where he was given the latest market study of a proposed new shopping center. The study calls for a construction phase of 1 year, and a subsequent operation phase. This question focuses largely on the construction phase.
The marketing staff has chosen a 12-acre site for the project that they believe they can acquire for $2.25 million. The initial studies indicate that this shopping center will have gross building area (GBA) of 190,000 sq. ft.
The head of the construction division assures the CEO that hard costs will be kept to $54 per sq ft. of GBA, and soft costs (excluding interest carry and loan fees) will be kept to $4.50 per square foot of GBA. Site improvements will cost $750,000.
The Shawmut Bank has agreed to provide construction financing for the project. The bank will finance the construction costs (hard and soft) and the site improvements at an annual rate of 13%. They will also charge a loan-commitment fee of 2% of the total balance.
The construction division estimates that 60 percent of the financed construction costs will be taken down evenly during the first six months of the construction project. The remaining 40 percent will be taken down evenly during the last six months.
a. What are the total construction costs that the bank is willing to finance?

b. Given the terms of the construction loan, what will be the total interest carry for the shopping center project?

c. What will be the total amount that Kuehner must borrow (Hint: remember to include interest carry)?

d. How much equity does Kuehner need to put into the project?

e. Acme Insurance Co. agrees to provide permanent financing for the project and “take-out” the construction loan at the end of 1 year. They agree to provide a fully amortizing mortgage with a 20 year maturity at a 12 percent annual interest rate. What is the monthly debt service that Kuehner will have to make once construction is complete and operations begin?

Solutions

Expert Solution

(a) Bank is willing to finance hard costs , soft costs & Site improvement costs = (54+4.5) * 190000 + 750000 = $11865000

(b)

Total Construction Cost       118,65,000
Months 1 2 3 4 5 6 7 8 9 10 11 12
Debt Drawn         11,86,500           11,86,500     11,86,500 11,86,500 11,86,500 11,86,500     7,91,000     7,91,000     7,91,000     7,91,000     7,91,000     7,91,000
Interest Rate Annually 13%
Interest Rate Monthly 1.08%
Interest Amount          1,54,245             1,41,391       1,28,538     1,15,684     1,02,830        89,976        51,415        42,846        34,277        25,708        17,138         8,569
Total Interest Amount $ 9,12,616

(c) Kuehner must borrow total amount = Construction Costs + Interest Carry = 11865000 + 912616 = $ 1,27,77,616

(d) Equity to be put up by Kuehner = $ 22,50,000

(e)

Total Amount of Loan that Acme Insurance Co. need to finance = construction cost principal amount + Interest Carry = 12277616
At the end of year 1, Debt Service = Principal Repayment + Interest Accrued
Principal Repayment just after construction phase is over considering 20 year mortgage = 12777616/(20*12)
$ 26620.03
Interest for the month = (12777616)*(1.08%) = $138424.17
Total Debt Service = 26620.03+138424.17
$ 165044.21

Related Solutions

The CEO of Kuehner Development Company has just come from a meeting with his marketing staff...
The CEO of Kuehner Development Company has just come from a meeting with his marketing staff where he was given the latest market study of a proposed new shopping center. The study calls for a construction phase of 1 year, and a subsequent operation phase. This question focuses largely on the construction phase. The marketing staff has chosen a 12-acre site for the project that they believe they can acquire for $2.25 million. The initial studies indicate that this shopping...
Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff....
Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20x0, and the group was discussing preparation of the firm’s master budget for 20x1. “I’ve decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full...
During a weekly meeting the CEO of company made an statement that he heard from a...
During a weekly meeting the CEO of company made an statement that he heard from a friend that “There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy certain criteria.” You as a chief account of the company is required to explain the to the CEO the key characteristics of Accounting Information with clearly providing example(s) wherever queried for each characteristic.
Question 3: 10 marks: The CEO of your company has come up through the ranks of...
Question 3: 10 marks: The CEO of your company has come up through the ranks of production and operations management. You greet him in the lift one morning and he comments that the company profits are down, therefore he expects to see an improvement in sales this month. He says that you, as head of marketing, must get everyone out there to convince the customers to buy the company’s products. His comments concern you because you know that Marketing isn’t...
The CEO of TRA Corp. has stated publicly that his company will do everything that is...
The CEO of TRA Corp. has stated publicly that his company will do everything that is legally required of it, but it will not contribute to charitable causes. TRA Corp.'s position is consistent with which stance to social responsibility? Select one: a. Proactive b. Non-charitable c. Obstructionist d. Accommodative e. Defensive
The CEO of a 400-bed hospital has scheduled a board of directors meeting to discuss the...
The CEO of a 400-bed hospital has scheduled a board of directors meeting to discuss the current financial situation of the hospital and steps that need to be done to correct some current problems. The CFO needs to send each board member an explanation of the financial statements that they will be discussing. You are the Director of Finance and he has asked you to put together a memo, explaining each statement. Do the following: Provide a copy of the...
You are in a meeting with Andrea Schwager, the new CEO of your company, discussing property,...
You are in a meeting with Andrea Schwager, the new CEO of your company, discussing property, plant, and equipment, when she asks the following: “The accountants are telling me that, if we sell a piece of equipment for an amount in excess of its carrying amount on our statement of financial position, then we record a ‘gain,' which increases net income. If it increases net income, then why don't we call it a ‘revenue'? Wouldn't this be more understandable for...
Your boss has just returned from a meeting of the Birmingham Society of Human Resource Management...
Your boss has just returned from a meeting of the Birmingham Society of Human Resource Management and announced that there are several concepts drawn from economics that might have an impact on your firm. Do the following for your boss: 1. Explain the “backward bending” supply of labor curve. Explain what goes on in the curve at various points and why that occurs. 2. Your boss thinks that your firm might be pure/perfect competitor in the product market but a...
The company has just come up with a new highly profitable product. As a result it...
The company has just come up with a new highly profitable product. As a result it plans to retain all earnings for the next 3 years (i.e. b=1) and invest them at a return (R) of 100% per year. After three years the company will go back to its old policy of retaining 60 percent of its earnings and investing them at 20 percent. What will be the new price of the stock? The new PE ratio The new premium...
The chief executive officer (CEO) of Faoilean Co has just returned from a discussion at a...
The chief executive officer (CEO) of Faoilean Co has just returned from a discussion at a leading university on the 'application of options to investment decisions and corporate value'. She wants to understand how some of the ideas which were discussed can be applied to decisions made at Faoilean Co. She is still a little unclear about some of the discussion on options and their application, and wants further clarification on the following: (i) Faoilean Co is involved in the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT