Why Toolbox Manufacturers Charge High Interest Rates and Mechanics Pay Them
explanatory Essay
876 words
Why do Toolbox Manufacturers Charge High Interest Rates and Mechanics are willing to pay for them?
The high interest rates of toolbox financing provide benefits for the manufacturing
company and the mechanics. The company increases their net income and the
mechanic receives financing, convenience and the name brand.
We have all been there. We walk into the garage of our mechanic’s shop, taking a quick glance; we see the huge elaborate toolboxes that each mechanic owns. Most of them are from Mac, Matco or Snap-On. Unless you work in the tool industry most people do not realize what the real cost of each of these boxes is.
The average toolbox costs a minimum of $4,500 and can run up to $9,500 for just one component of the set. The Big Three toolbox companies in the industry are Mac, Matco and Snap-on and all are using outrageous interest rates depending on state requirements. The rates vary from 6.25% all the way up to 22.50% in most states.
So how much does that toolbox really cost if a mechanic makes weekly payment for the whole term of the contract? A $4,500 dollar contract as the
principle balance at 22.50% interest while paying $32.71 a week for 208 weeks (4 years) will cost a total amount of $6,803.68. That is over $2,000.00 in
interest. Looking at a $9,500 dollar contract at 22.50% interest while paying $69.06 a week for 208 weeks, will cost a total amount of $14,364.48. That is almost
$5,000.00 in interest!
Looking at this scenario from a company’s
perspective, there has to be a point of
competitiveness. Each manufacturer offers in-house
financing for mechanics that are interested in buying
their product. Due to many mechanics having little or
damaged credit, the companies are taking a financial risk by financing them. Considering that for
every 100 contracts the company buys 2 will default on the loan. There is a 2% chance of default
on a loan. Each company buys 300 contracts on average per day, approximately 78,000
contracts annually which means that 1,500 will more than likely default. The rate of interest on
the company’s part is determined by an estimate of how much money will be lost.
If the interest income from these rates makes up approximately 35% of each company’s net
income, then the total amount of interest income would be 37% from these contracts.
1
For the
company, the benefit of bringing in a 35% net income outweighs the cost of a 2% loss of interest
income.
The other point of view, the mechanic’s, involves three solutions to this question.
In this essay, the author
- Explains why toolbox manufacturers charge high interest rates and mechanics are willing to pay for them.
- Explains that the benefit of 35% net income outweighs the cost of a 2% loss of interest.
- Explains how the big three toolbox companies, mac, matco and snap-on, charge outrageous interest rates based on state requirements. a $4,500 dollar contract with $32.71 a week will cost $6,803.68.
- Explains why toolbox manufacturers charge high interest rates and mechanics are willing to pay for them.
- Explains that the benefit of 35% net income outweighs the cost of a 2% loss of interest.
- Explains how the big three toolbox companies, mac, matco and snap-on, charge outrageous interest rates based on state requirements. a $4,500 dollar contract with $32.71 a week will cost $6,803.68.
- Explains that companies are taking a financial risk by financing them. for every 100 contracts the company buys 2 will default on the loan.
- Explains the rate of interest on the company's part is determined by an estimate of how much money will be lost.
- Explains that the mechanic's viewpoint involves three solutions to this question. one mechanic would say he doesn't know the interest rate on the contract, another would state there is.
- Explains that companies are not required to disclose the interest rate in writing and many mechanics don't bother to ask until the contract is already signed.
- Explains that the toolbox industry has distributors who come to each mechanic's shop weekly or biweekly to service their tool needs and collect the weekly payment for the company.
- Explains that the answer to this question can be answered by looking back at the company's viewpoint. if a mechanic has little or damaged credit, how are they going to be able to go to retail store?
- Opines that a mechanic would be willing to pay high interest rates due to the name of the company, which carries its reputation for their overall quality.
- Explains that high interest rates for toolbox financing provide a win-win situation for the companies and mechanics.
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- Explains competitor acquisition offer details type of offer dividends tax free offer accepted/rejectedh.k. cooper cash $42 no no vln corporation convertible stock $53.10 yes yes
- Explains that the terms cooper needs to offer would have to exceed those offered by vln. the exchange of stock would be tax-free as opposed to a cash offer.
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- Recommends that cooper offer convertible stock at $24, the last closing price, for each nicholson share, within the first five years after the offering.
- Cites chang, s. suk, d. failed takeovers, methods of payment, and bidder returns, financial review.
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- Opines that the problem is to turn around the company in terms of proper management structure, proper business lines, and most importantly proper cash position.
- Opines that we can downsize the company by disinvesting from some of the irrelevant and non-performing businesses, and give some corporate structure to the business.
- Explains that the current circumstances have made them re-think about the governance of their company. the strategic options evaluated are divesting from some of the businesses, re structuring management by giving generalised top management or using specialized management.
- Opines that the problem is to turn around the company in terms of proper management structure, proper business lines, and most importantly proper cash position.
- Opines that we can downsize the company by disinvesting from some of the irrelevant and non-performing businesses, and give some corporate structure to the business.
- Explains that we can generalise the lines of business and hire a good top management to run the business.
- Explains that we can identify a good manager for each line of business and run the business.
- Explains that each option is evaluated on the basis of following criteria which are considered of prime importance.
- Opines that we need to raise the cash reserves of the company to upgrade the tool business.
- Opines that the management should be such that it can efficiently run the company. this would ensure continuous development and surpass its competitors.
- Opines that the sustainability of profit is also very important. the company's growth gives good return to stakeholders, which ultimately is the objective of the company.
- Opines that we need to ensure that our reputation is not spoiled so that shareholders can trust us.
- Opines that a company can build its reputation in terms of its core competency, but too much downsizing can lead to loss of repute.
- Opines that the firm will be looked upon as a diversified company and flexible in its approach.
- Recommends disinvestment and building corporate structure to get rid of inefficient employees and non-performing businesses. tool business needs b2b marketing, where efficient running is ensured by smaller management and sound technology.
- Identifies the non-performing businesses that cannot be integrated. the key is the businesses with steep competition, low profitability, and are not related.
- Recommends public offering businesses if cash generated is insufficient for advancement, which can ensure that cash flow is high and grow with a greater magnitude.
- Opines that miller tool company needs to sort out a number of matters in the coming future. the company has diversified so much that it has lost its core competency.
- Explains that the disinvestment will give good cash position, as non-performing and irrelevant businesses are sold out. the cash building will be slow, and specialized management will save cash.
- Opines that as the company is downsized, it can efficiently run its business. the integration of various businesses should be dealt with carefully. a centralised system will lead the processes to be system driven.
- Explains that the system built can ensure that company uses its funds properly, which leads to good future potential.
1134 wordsRead More - The Royal Mail 's Capital Structureexplanatory essayAssessing the capital structure of any firm is important for investors attempting to determine if...
In this essay, the author
- Explains the importance of assessing the capital structure of any firm for investors attempting to determine whether a firm is maximising shareholder value.
- Explains that rm's full year report (2015a) clearly states that its overall cost of debt is 3%. the report details the type of type and its values and relative costs.
- Explains that the rm in its full year report quotes a total debt value of £275m, which is different from the value reported for long-term liabilities in their consolidated balance sheet.
- Explains the importance of assessing the capital structure of any firm for investors attempting to determine whether a firm is maximising shareholder value.
- Explains that rm's full year report (2015a) clearly states that its overall cost of debt is 3%. the report details the type of type and its values and relative costs.
- Explains that the rm in its full year report quotes a total debt value of £275m, which is different from the value reported for long-term liabilities in their consolidated balance sheet.
- Explains that emt assumes that investors have perfect information and that this is reflected in the share price. the wacc uses share prices to value equity and the capm uses the variance of shares to estimate risk.
- Explains that rm's share price was 524p on the 27th may, giving a market capitalisation of £5,277. the report will only use value.
- Explains that the dividend model can be used to estimate the cost of equity.
- Explains that rm's full year report states an expected dividend growth of 5% with a dividend payment of 21p.
- Explains that investors might be concerned about the risk of re-nationalisation as the rm still has a near monopoly in the area of letter delivery.
- Explains that applying this formula using the two values of debt produces a wacc of 7.91% for the higher and 8.71%
- Explains that wacc can be used to estimate the required cash returns for a firm, using the formula.
- Opines that investors would expect cash returns of £511m for the higher value of debt, and £483m in the lower value.
- Explains that actual investor returns over the accounting period 21p dividend and a 12p increase in share price gives total return on investment of 6.45%.
- Explains that the report will critically review the capital structure of the royal mail and the implications this has for the company with reference to its apparent value and return required by equity investors.
- Concludes that the capm model will not add value to analysis of rm’s capital structure.
- Explains that the wacc can be calculated pre or post tax. the historical comparisons used for this report (consignia 2002, amaral et
- Explains that rm's share price fell after the government sold its remaining shares, which is in line with the idea that government have a lower cost of capital than private investors.
1988 wordsRead More - Financial Distress: Bankruptcyexplanatory essayFinancial distress which results in bankruptcy are very common for businesses in today’s economy. According to CNN Money Fortune 500, “Last year marked the highest number of billon-dollar bankruptcies ever recorded. And corporate bankruptcies have continued at an elevated clip, with about twice the number of businesses filing for bankruptcies filing for bankruptcy protection in the 12 months ending June 2010, as they did during the same span of time in 2008, 2007, or 2006.” (Roane, 2010) It is very important for every financial manager to acknowledge that bankruptcy can be a reality for any company and financial managers have to know how to prevent it. Most all companies have debts and these debts are used for financial leverage, but they have to be closely monitored by the financial manager. Many monthly debts that companies are faced with are, making monthly payments to vendors, and paying employees. It is the financial managers to manage and monitor these debts, so that the debts don’t become more than the equity. (Ross, Westerfield, & Jordan, 2010)
In this essay, the author
- Explains that in order to prevent any type of bankruptcy a company must keep its assets lower than his debt. it is important for financial managers to manage debt-equity ratios while increasing leverage within the company.
- Explains that financial distress is common for businesses in today's economy, and financial managers must know how to prevent it.
- Explains chapter 11 bankruptcy is when a company reorganizes their business so that they can start making revenue again.
- Explains that in order to prevent any type of bankruptcy a company must keep its assets lower than his debt. it is important for financial managers to manage debt-equity ratios while increasing leverage within the company.
- Explains that financial distress is common for businesses in today's economy, and financial managers must know how to prevent it.
- Explains chapter 11 bankruptcy is when a company reorganizes their business so that they can start making revenue again.
- Explains that bankruptcy is when companies completely go out of business. a trustee is appointed to liquidate assets and the money is used from the sale of the assets to pay off debt.
- Explains that some companies will file bankruptcy and use it for financial leverage. this type of bankruptcy is called strategic bankruptcy, and a financial manager must carefully examine the cost to file compared to the financial gain of restructuring.
1298 wordsRead More - Garage Fraudexplanatory essayHave you ever wondered why it cost you hundreds of dollars to get a belt changed on your car? The answer is simple: Auto-repair fraud. According to Norris and Engel’s book Auto Repair Fraud, the number one consumer complaint in the country is auto repair fraud. Americans pay more than 29 billion dollars a year to service and repair vehicles. According to a three year U.S. Senate sub-committee investigation into the auto repair industry, one-third of all car repair dollars, ten-billion dollars a year, is wasted on inadequate, inept, or corrupt service.
In this essay, the author
- Explains that auto-repair fraud is the number one consumer complaint in the country. americans pay more than 29 billion dollars a year to service and repair vehicles.
- Explains that auto-repair fraud, or "garage fraud," can take place anywhere from service stations to garages.
- Explains that many people leave their vehicles unattended at shops or can't see what is going on inside the garage.
- Explains that auto-repair fraud is the number one consumer complaint in the country. americans pay more than 29 billion dollars a year to service and repair vehicles.
- Explains that auto-repair fraud, or "garage fraud," can take place anywhere from service stations to garages.
- Explains that many people leave their vehicles unattended at shops or can't see what is going on inside the garage.
- Explains that there are many places and circumstances in which "garage fraud" can take place. america is so lazy that they will take the chance of being cheated, rather than learn how to check their own oil.
563 wordsRead More - Disneyland Hong Kongexplanatory essayi.e. 8 years after closing of the loan and 6 years after funding of the loan
In this essay, the author
- Explains that collateral for the deal (land) would only become gradually available as the government first.
- Analyzes chase's financing requirements and the pros and cons of the deal.
- Explains that hong kong international theme parks ltd (hkitp) was formed to build the new disneyland in hongkong. while the owners supported the project with substantial amounts of equity, disney had significant requirements for the financing portion of the remaining needed amount.
- Explains that collateral for the deal (land) would only become gradually available as the government first.
- Analyzes chase's financing requirements and the pros and cons of the deal.
- Explains that hong kong international theme parks ltd (hkitp) was formed to build the new disneyland in hongkong. while the owners supported the project with substantial amounts of equity, disney had significant requirements for the financing portion of the remaining needed amount.
- Explains the delayed amortization structure which would start as late as 3 years after the opening of the park, i.e.
- Explains that disney remained conservative with regard to the overall capital structure, but they also chose to access the markets in 2000 to ensure access to funds at attractive pricing.
- Opines that the deal had broader implications for chase's franchise. chase was a leader in the us syndicated loan market and had strong market position in asia and project finance syndication.
- Explains that disney is asking for a fully underwritten deal, so chase would face underwriting risk and syndication failure, which would negatively impact chase's reputation.
- Explains that chase had to make a decision about how to bid for this deal, since they didn't want to jeopardize their relationship with disney.
- Explains chase's strategy of inviting sub-underwriters, which decreased the underwriting and credit risk for chase, and increased overall syndication support.
- Explains that the group consisted of a mix of relationship banks as well as other local banks, which led to an oversubscription of the deal.
1681 wordsRead More - Aiding Barra Airways With ROCEopinion essayBarra Airways has an interest coverage ratio (ICR) of 18; this means that Barra Airways is not burdened with a large amount of interest payments on existing debts. Therefore, using debt does appear to be an attractive source of finance. This is because Barra Airways existing interest burden is low, meaning that to increase it would have a reduced effect on the company’s net profit. However, EasyJet has an ICR of 30.88, considerably larger than that of Barra Airways [5]. Lenders may look at this data and conclude that Barra Airways is a riskier company to lend too than others in the same industry; this will result in a higher interest rate on any debt taken out.
In this essay, the author
- Explains that equity investors will look at the roce in order to determine if a firm is effectively deploying its capital.
- Explains that barra airways has an interest coverage ratio of 18 and uses debt as a source of finance.
- Analyzes the benefits and drawbacks of both the debt and equity method to determine which method of raising finance would be appropriate for barra airlines.
- Explains that equity investors will look at the roce in order to determine if a firm is effectively deploying its capital.
- Explains that barra airways has an interest coverage ratio of 18 and uses debt as a source of finance.
- Analyzes the benefits and drawbacks of both the debt and equity method to determine which method of raising finance would be appropriate for barra airlines.
- Opines that using equity as a source of finance would mean that barra airways would be increasing the level of shareholder accountability it currently has.
- Explains that the company will not be debt repayments due to the long-term nature of the project, which allows more opportunity for a negative external factor to arise.
- Explains that using equity as a source of finance could mean that barra airways would face increased dividend costs.
- Opines that the state of financial markets can have considerable effect on the success of an equity issue.
- Explains that barra airways has the option of using to debt to finance its project, which would allow it more freedoms in making decisions and reduce its vulnerability to shareholder activism.
- Explains that interest rates are at historical lows, and with the uk economy recovering, they are likely to increase in the new future. barra airways would acquire debt at the lowest cost for many years to follow.
- Opines that equity and debt financing would be effective sources of finance for barra airways, but the company's financial state and the nature of the project must be taken into consideration.
- Recommends that barra airways go ahead with the project because it is predicted to a high npv coupled with strong cash flows.
831 wordsRead More