April 3, 2012

Buying or Selling Stocks

Stock Market GameMarch 5 – May 11

Partners/Teams:Kwaku and Reilly Lauren B. and Lauren C. Caleb and Jared India and PatrickCharlotte and Winnie

Buying & Selling (10 Minutes): Buying & Selling will take place on Monday,

Wednesday and Friday during the first part of class.

Research company before making purchase

Warm-up- 4/1 1. What type of business loan is often packaged

with a real estate loan?2. What would a business finance with a term

loan?3. Most business short-term loans are for how

long?4. What is factoring?5. Debt divided by Income = 6. What does a high DSCR (debt service

coverage ratio) indicates that a company has?Add to existing warm-upWe will meet in 5 minutes

Student Learning Map – Commercial LendingKey Learning#3:The purpose of the SBA

Essential Question#2: What is the purpose of the SBA and what are

the loan options?

Vocabulary: Small Business Administration (SBA)7 (a) Loan GuarantySBA Express Loans

Commercial LoansPurpose of Commercial Loans:

Real Estate, Construction, Equipment, OperationsTypes of Commercial Loans:

Term Loans, Short-Term Loans, Lines of Credit, Real Estate and Equipment Loans, Contract Financing, Bridge Loans, Leasing, and Asset-Based Loans

Types of Business that acquire Commercial LoansMerchandisers – sell goods or servicesManufacturers – build items to sell to merchandisers

Commercial Credit Analysis – take notesAnalysis of a business (all types/sizes) can

repay their loanSame general steps and ideas apply as

consumer loans but with some modifications :Assess individuals employment, IncomeCurrent amount of debt to determine if loan can

be repaidAnalyzing a business is far more complicated

Past financial statements are studied Underwriters estimate the likelihood of the

business future success The relationship between the bank and company

is vital

Commercial Credit AnalysisLarge corporations, very complex – lenders

hire or employ financial analysts that carefully study a company’s financial position.

Whether large or small business the financial analysis for a loan is measured in three ways

The measurements determine whether the loan makes sense for the company

Read pages 272 Debt Ratio, 273 Loan-to-Value Ratio, 273 -274 Debt to Service Coverage Ratio

Debt RatioDebt Ratio ~ is the total obligations (how much

debt ) compared to the total income. (debt could be existing loans)

Formula for calculating Debt RatioDebt ratio = Debt / IncomeExample:

Monthly income $3000 Monthly debt $1500

Debt ratio= $1500 / $3000 = .5 or 50%Note: Lenders will usually not consider a

business with a debt ratio above 40 percent. (above scenario?)

Loan-to-Value (LTV) RatioLoan-to-Value (LTV) Ratio ~ the principal amount of

the loan divided by the value of the securing property.

Formula for calculating LTV RatioLoan-to-value ratio = Principal / Market ValueExample:

Principal $500,000 Market Value $1,000,000

LTV ratio= $500,000 / $1,000,000 = .5 or 50%Note: Lenders for commercial mortgages more

conservative, look for a LTV ratio of 80% maximum and will not lend more than 60% than the appraised value. (above scenario?) Review another sample - Excel

Can get complicated for business property such as equipment. Real estate usually appreciates while equipment loses value.

Debt Service Coverage Ratio (DSCR)Debt Service Coverage Ratio (DSCR) ~compares

net operating income to the total cost of debt. Net operating income is gross income minus

expenses, taxes, insurance, utilities, etc. (It does not include debt for mortgages, equipment, services , etc.)

Cost of Servicing the debt, including all principal and interest, but not taxes or insurance

Used for commercial real estate, and looks at company’s overall position

Not a simple task to compile these

numbers

Debt Service Coverage Ratio (DSCR)Formula for Debt Service Coverage Ratio (DSCR)

DSCR = Net Operating Income / Total Debt ServiceExample Small Business:

Net Operating Income $650,000 on a gross income of $1,000,000 (minus expenses, taxes, insurance, utilities, etc.)

Total Debt Service - $520,000 (includes principal, interest but not taxes or insurance)

DSCR = $650,000 NOE/ $520,000 TDS = 1.25Note: The lender prefers to see a high DSCR, the

more net operating income is available for debt service. A ratio of 1.0 negative cash flow. Lenders except different ratios; however, never below 1.00. (above scenario?)

Calculate the Ratios - ExcelFile – Chapter 9 Math – Commercial Credit

AnalysisReview calculations Complete questions 1 and 2 using the

existing formulas Explain your results – print out and hand

write results

Other EvaluationLenders want full access to company’s financial

records.Very complex compared to individual lendingLender must understand the true nature of a

company’s financial position can a lender hope to make a sound decision

Lenders want to examine the following:Federal and Income tax returns for three yearsYear-to-date profit and loss and balance statementsProjected cash flow estimates for at leas the coming year Valuations and appraisals for collateral used to secure the loanWritten business plan (for small business)Personal financial statements of owners (for new or small

business)

9.3 Activities Small Business Loan Programs9.3 Activities

SBA project/presentationIndia, Caleb and Patrick

Starting a Business – Use Credit WiselyWebsite Activity ~ Understanding Business CreditTo help make good business decisionsReview of Project and Website…

https://www.citicards.com/cards/wv/html/cm/business/index.html80 Process Points Questions 20 Product Points

PresentationPartners: Winnie & Patrick Lauren C. & Lauren C.

India & Jared Caleb & Charlotte Kwaku & Reilly You will each be responsible for completing the project, each

person must complete ½ or a section of the project – online activity

You will not receive the same points as your partner unless you equally share the workload

You will briefly explain your business to the class and discuss your loan criteria through the use of PowerPoint, 2-4 slides

Starting a Business – Use Credit WiselyBusiness Development:Now that you have the true understanding of business credit,

commercial lending and the SBA, you and your partner must decide on a type of business. What is your business? Provide a brief overview - purpose

Is it a manufacturing or merchandising business? What do you produce a product or provide a service or

bothWhat will you need to establish your business (building,

equipment, etc)?What will you need to run your business

What type of funding will you obtain, commercial loan – what type or SBA – what type?What type of loans do you need to be successful Will you lease instead of purchase

Business Presentation Guidelines Project: 80 Process Points for Questions -20 Product Points for

Presentation

Presentations 2-3 minutes, everyone participatesSlides – 2 to 4 slidesAll questions should be answeredMake sure all information is relevant and related to

your topicPresentation format should be legible, include

graphics, images, charts, etc. that represent you topic

Use of inappropriate graphics, etc. will result in loss of points for the entire group

Note: Any changes made to the assignment must be discussed with Mrs. Marine prior to completion

Rubric – Business PresentationProject ___ ___ ___(presented topic – answered all questions)Presentation ___ ___ ___(met time allocations, use of graphics/images)Assignment ___ ___ ___(Completed all parts of the assignment)Stayed on Task ___ ___

___(Did not deviate from completing assignment,

and finished in allotted time)

Agenda Monday

Using Credit Wisely Developing your Business – answer all questions and

prepare PowerPoint to share with the class

Tuesday Turn in Using Credit Wisely PowerPoint and Business Presentations to class Study Guide Review for test

Wednesday Commercial Loans Assessment

Thursday Mr. Terranova – Guest Speaker - Commerical Lending

Study GuideComplete Study Guide

50 Process PointsCollecting before test

Review for test: (All papers returned)Graphic OrganizersActivitiesStudy Guide, Student Learning Map

Taking books out?

We will meet in 20 minutes

Exit TicketHow are consumers loans alike and how are

they different Provide two reasons for each.(compare and contract graphic organizer)