Question

Mary, the plant manager of Southern Oregon Injection Molding, Inc. (SOIM), is pondering an interesting offer made by the president and majority shareholder, Kenny. Kenny recently turned sixty and is planning a gradual retirement. None of his children are interested in taking over the business and are currently pursuing careers unrelated to the plastics industry, so Kenny has decided to offer his controlling share to Mary.

SOIM began by manufacturing plastic lawn ornaments, including a colorful tropical bird that became a major fad in the 1980s. Pleased and amused by the success of his fanciful product, Kenny added rabbits, skunks, trolls, angels, and garden fairies to the product line. Under Mary’s leadership, SOIM has also become an important secondary supplier of plastic housings for speakers, cell phones, calculators, and similar products.

Marry started working at SOIM as a color technician shortly after graduating from Southern Oregon University with a degree in chemical engineering. Within five years, she became the plant manager, a position she has held for the last eight years. Along the way, she has earned an MBA through the 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 finance the purchase.

Questions

1. Mary could probably borrow the money to purchase the shares outright because the shares would serve as collateral and dividends would cover a good part of the loan payments. The interest rate is 7%, and the lender will amortize the loan with a series of equal payments. What are the annual payments if the bank amortizes the loan over five, ten, or twenty years?

2. Repeat Question 1, but assume that Mary makes payments at the beginning of each year.

3. Complete the following amortization schedule for a $10,000,000 loan at 7% with five equal end-ofyear payments.

4. Kenny has offered to finance the purchase with a ten-year, interest-only loan. How much is Mary’s annual payment? Describe the pattern of payments over the ten years.

5. Assume that Kenny accepts Mary’s offer to finance the purchase with a ten-year, interest-only loan. If Kenny can reinvest the interest payments at a rate of 7% per year, how much money will he have at the end of the tenth year?

Answer 1

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