Missouri FFA and Agriculture Education - Student … Credit an… · Web viewMissouri Personal Finance SI.6 Analyze factors affecting the rate of return on investments (e.g., Rule

AP6

Agriculture Management, Economics, & SalesCredit and Loans

Unit: Agribusiness Planning & Analysis

Lesson Title: Credit and Loans

Standards

ABS.04.01.02.c. Evaluate characteristics of lines of credit, loan terms and alternatives in sources of capital.ABS.04.01.02.a. Identify financial concepts associated with production and profit.ABS.05.01.04.a. Calculate percentages, ratios and related business applications.

Missouri Personal Finance SI.6 Analyze factors affecting the rate of return on investments (e.g., Rule of 72, simple interest, compound interest).

CCSS.Math.Content.HSA-CED.A.4 Rearrange formulas to highlight a quantity of interest, using the same reasoning as in solving equations.CCSS.Math.Content.HSN-Q.A.1 Use units as a way to understand problems and to guide the solution of multi-step problems; choose and interpret units consistently in formulas; choose and interpret the scale and the origin in graphs and data displays.CCSS.ELA-Literacy.SL.11-12.5 Make strategic use of digital media (e.g., textual, graphical, audio, visual, and interactive elements) in presentations to enhance understanding of findings, reasoning, and evidence and to add interest.

Student Learning Objectives

Slide 2 in AP6 Credit and Loans Lesson ObjectiveAfter completing the lesson on credit and loans, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Credit and Loan Info Gram.

Enabling Objectives

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As a result of this lesson, the student will…1. Define two types of loans, calculate asset to liability ratio, and define leverage and how it

can be beneficial to a business.2. Identify three types of credit institutions and describe the loans they provide; describe

three types of credit instruments used by lending agencies.3. Define interest, calculate simple interest, calculate compound interest, and calculate an

amortized loan payment.

Time: Approximately 250 minutes

List of ResourcesAnnual Payment Loan Calculator. Retrieved from:

http://www.mycalculators.com/ca/aloanm.html.

Bacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N. (1988). Agriculture Management and Economics Instructor Guide. Columbia, MO: Instructional Materials Laboratory.

Bacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N. (1988). Agriculture Management and Economics Student Reference Guide. Columbia, MO: Instructional Materials Laboratory.

Instructional Materials Laboratory. (1997). Agribusiness Sales, Marketing, and Management Instructor Guide. Columbia, MO: University of Missouri.

Schneiderheinze R., Wood C. (1997). Agribusiness Sales, Marketing, and Management Student Reference. Columbia, MO: Instructional Materials Laboratory.

Discover Education. (n.d.). WebMath. Retrieved from: http://www.webmath.com/.

List of Tools, Equipment, and SuppliesAP6 PowerPoint PresentationAP6 Activity Sheet and Evaluation PacketNote cards or small sheets of paper for review activity.

Key TermsSlide 3 in AP6 Credit and Loans

The following terms are presented in this lesson (shown in bold italics):LeverageAssetsLiabilityEquityInterest PrincipalAmortized

Agribusiness Planning & Analysis AP6 Credit and Loans

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Simple InterestCompound Interest


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Interest Approach: Use an interest approach that will prepare the students for the lesson. Teachers often develop approaches for their unique class and student situations. A possible approach is included here.

Slide 4 in AP6 Credit and LoansReady To Buy! – Facilitate a class discussion on credit and loans using the PowerPoint slide. First, ask students, “Who plans to buy, or has bought, _________________?” Pictures of a car, house, farm land, and businesses will pop up on the slide one by one. Have students shout out their thoughts and come up with other ideas of things they plan to buy in the future – big purchases that most cannot make without excessive planning.

Next, the question “How do you plan to pay for these things?” will pop up on the screen. Get students’ ideas and lead them towards the fact that they will either have to set up a strict personal savings plan or they will need to take out a loan.

Ask students, “Where can we go to get this loan?” to gather ideas on their knowledge of sources of loans.

Facilitate discussion on the question, “What things will be important to a person, bank, or financial institution thinking about loaning you the money?” Lead students towards the idea of their credit history as discussed in the previous lesson AP5 Obtaining Financing for an Agribusiness.

Finally, ask students to consider, “What do you need to consider before signing your name to the loan?” These answers should include such things as interest rates, monthly payments, leverage, co-signer, early pay-offs, etc.

Conclude interest approach by summing up all ideas above and introducing the objectives of the lesson.


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Summary of Content and Teaching Strategies

Objective 1: Define two types of loans, calculate asset to liability ratio, and define leverage and how it can be beneficial to a business.

Teaching Strategies Related Content1. Facilitate a discussion what students

know about different types of loans.

Slide 5 in AP6 Credit and Loans

2. Ask students, “When do you think it is okay to borrow money?”


3. Introduce that businesses and individuals can get into trouble if they borrow too much, so they must consider what is “safe to borrow.”

Slide 7-8 in AP6 Credit and Loans

4. Pose questions to get students’ thoughts on the definition of leverage.

Types of Loans Long-term loans – Working capital,

expansion, refinancing, or real estate acquisitions; 7-30 year terms

Short-term loans – Due within one year or less; Seasonal or operating needs

Intermediate-term loans – Equipment financing; 3-7 year terms

Lines of Credit – General business loans established to insure against cash flow problems; 1-3 year terms

Credit card advances Leases

Money should be borrowed… For a planned investment To offset expenses in the cash flow For emergency expenses

Factors that influence how much a business can safely borrow

Asset to liability ratio of 2 to 1 is desirable; Asset – A resource or property owned by an individual or business; Liability – A debt owed by an individual or business; For every dollar the business owes, it has two dollars worth of assets; If ratio decreases, business has too high of level of debt; Rule of thumb – Have lender match the business dollar for dollar; If business borrows $1,000 and has $1,000 of its own, it has $2,000 of assets and $1,000 of debt or a 2-1 asset to liability ratio

Amount of outside income Age and health of borrower Type of assets or business General economic conditions


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Leverage The use of someone else’s money with

one’s own to provide financing for a business – You own 40% of a landscaping business and borrow the other 60%. You are said to be 60% leveraged. The 40% you own is called your equity; Equity – Financial measure of the value of a business or person; Assets – Liabilities; Also known as Net Worth

Profitable as long as leverage increases earnings more than the expense of borrowing money – Current rate of interest is 10%; Must have a greater return than 10% on the borrowed money to make a profit; If money is currently returning 15%, you are earning 5% borrowing the money; Last year you only earned 8%, but had to pay 10%; You lost 2% on borrowed money during the year

2 types of leverage Financial leverage – The use of

borrowed money to increase production volume, sales and earnings; Measured as a ratio of total debt to total assets; Greater the amount of debt, the greater the amount of leverage

Operating leverage – When a firm commits itself to a high level of fixed operating costs as compared to variable costs; Operations with high operating leverage have high breakeven costs

Objective 2: Identify three types of credit institutions and describe the loans they provide; describe three types of credit instruments used by lending agencies.

Teaching Strategies Related Content1. If the section on “Sources of Business

Financing” was taught in lesson AP5, have students get out their chart and review these types of loans. If lesson or section of lesson was not taught,

Types of loans (See chart from AP5) Farm Credit System – Provides short,

intermediate and long-term loans for land, equipment, inventory, business assets, and operating loans for


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have students complete AP6.1 with PowerPoint presentation.


2. There are a number of credit instruments used by lending agencies.


production agriculture and agribusinesses

Commercial Banks – Offer short-term and long-term loans and a payment schedule that requires a single payment or periodic payments of interest and principal; Loan money for real estate, inventory, or capital assets

Savings and Loans – Primarily set up for long-term use for real estate

Government Agencies – Farm Service Agency – Provides direct and government-guaranteed farm loans to persons engaged in agricultural production who will be owner(s) or operators of an agricultural production operation or facility when the loan is closed; Makes loans for farm ownership, soil and water conservation improvements, operating expenses, and emergency purposes; Small Business Administration – Primarily guarantees a certain percentage of short- and long-term loans made by private lenders to entrepreneurs and small businesses

Insurance Companies – Allow individuals to borrow against the cash surrender value of their life insurance policy to make purchases; Short- and long-term goals

Venture capital – Money that can be invested in the ownership of a business; May involve selling stock on the open market to investors or taking on partners

Dealers/Suppliers – Loan almost exclusively on the product the dealer is selling: Cars, tractors, feed, fertilizer, greenhouse, etc.

Individuals – Loaned primarily for the sale of real estate with owner financing personal loans to relations and friends

Credit instruments used by lending agencies Draft – Check from lender paid directly

to business from which the borrower is purchasing; Bill borrows money from a


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bank to purchase computer equipment from Best Buy. The bank writes the check directly to Best Buy for the amount Bill plans to pay

Note – Written promise to pay; After debtor signs a note, the bank transfers money to a debtor’s account or provides the debtor with a draft

Mortgage – Written claim the creditor holds on property used as collateral; Often involves long-term loans for real estate purchases

Lien – Legal claim to property filed by the creditor with county Recorder of Deeds

Warehouse receipt – Receipt for merchandise stored in warehouse; Grain is owned by farmer, but warehouse has possession; Can be used for collateral or can be used to transfer ownership

Bill of lading – Receipt for items in transit; Provides proof of ownership

Sales contract – Written agreement specifying terms and payment for sale of an item

Objective 3: Define interest, calculate simple interest, calculate compound interest, and calculate an amortized loan payment.

Teaching Strategies Related Content1. Ask students how they would define

interest. Is it a good/bad thing? What is the point of interest? How is it calculated? Let student input guide discussion before introducing interest.


Slide 17 in AP6 Credit and Loans Interest Expense incurred on money that is

borrowed or invested; A “rental fee” for money borrowed or invested

2 types of interest – Simple and


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2. Have students come up with examples of loan amounts, principal, and length of loan. Put numbers on the board and have students come to the front one by one to figure the simple interest. This could also be done in partners. AP6.2 is available for students to show their work and record practice problems.

3. Students may also be introduced to http://www.webmath.com/ to assist in the calculation of simple interest.


4. Have students come up with examples of principal, yearly rate of interest, length of loan, and number of times interest is compounded. Put numbers on the board and have students come to the front one by one to figure the

compound

Simple Interest Interest that is paid only on the sum of

money loaned, or the principal i = prt – (i) interest, (p) principal, (r)

rate of interest charged, (t) amount of time

If a loan for $1,000 was taken out at 8% interest, the simple interest after 6 months would be ____ - i = ($1,000)(.08)(.5)

i = $40

Compound Interest When principal is calculated not only

on the principal but also on the accrued interest

If a loan for $1,000 was taken out at 7% interest, the compound interest after 3 years would be _______

Year 1 = $1,000 x .07 = $70 + $1,000 = $1,070; Year 2 = $1,070 x .07 = $74.90 + $1,070 = $1,144.90; Year 3 = $1,144.90 x .07 = $80.14 + $1,144.90 = $1,225.04

A=p (1+ rx)

yx – (A) amount of

principal and interest, (p) principal, (r) yearly rate of interest, (y) number of years, (x) number of times interest is compounded yearly

A=$1,000 (1+ .071

)3 x 1

= $1225.05


http://www.webmath.com/

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compound interest. This could also be done in partners. AP6.3 is available for students to show their work and record practice problems.

5. Students may also be introduced to http://www.webmath.com/ to assist in the calculation of compound interest.

6. Facilitate a discussion tying in the fact that interest is calculated in two different ways, and loan payments can also be calculated in a variety of ways. Get students’ thoughts on how most loans are calculated, how they would prefer to pay back a loan if they borrowed, etc.

7. One type of loan repayment schedule is called an amortized loan.


8. Complete the amortized loan chart as a class.


9. Complete AP6.4 through a teacher-led format for more practice calculating interest. Complete a problem together as a class and then let students complete the next individually. Before

Amortized Loans Paid off in installments over time Each payment covers current interest

and part of principal Equal-payment plan – Each payment is

the same amount of money; Early payments = more interest and less principal; Interest payments decrease in later years as outstanding principal decreases

Amortized Loan Example Clark is taking out a loan for $12,000

for 5 years at 8% interest. His annual payments are $3,005.48

Step 1 – calculate interest = 12,000 x .08 = 960

Step 2 - $3,005.48 - $960 = principal payment of $2,045.48

Step 3 – loan balance = $12,000 - $2,045.48 = $9,954.52

Continue these steps, using the loan balance to figure the interest each time.


http://www.webmath.com/

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moving on, compare answers or have students come to the white board to show how they completed the problem.

Review/SummarySlide 22 in AP6 Credit and Loans

In today’s business world, almost every business is faced with the problem of obtaining adequate capital to buy needed supplies and equipment. One means of obtaining the needed capital is to secure a loan. In order to borrow money from an established lending agency, you must be able to provide accurate financial records to show a reasonable means of repayment. To accomplish this goal, the manager must be able to determine a safe borrowing procedure for the business. The manager then needs to evaluate the different sources of credit and ways of calculating interest in order to determine which method of financing meets the needs of the business.

Review: Complete a loan application as a class, individually, in partners, or in small groups at http://info.myfcsfinancial.com/ffa-application-download. Walk students through the various pieces of the loan application, pointing out the correlation between the loan application and content from this lesson.

Slide 23 in AP6 Credit and LoansExit cards: Students will answer the following questions on a note card or small slip of paper and hand to teacher as they exit:

What did you learn today about credit and loans? What questions do you still have about credit and loans?

Application

Extended ActivitiesAssign each student a different type of loan. Have them conduct research on that type of loan, complete an Internet search, interview a local banker or loan officer, and find three articles from MSN Money, CNN Money, or Yahoo Money. Each will create a three-slide PowerPoint presentation on their findings and present it to the class for discussion and comparison of the other types of loans researched.

Research loans available to young farmers and/or those starting a small business. Use Internet sources, local lending agencies, brochures, etc. Present findings during the special program section of the next FFA meeting.


https://bluprd0711.outlook.com/owa/redir.aspx?C=iOBS52w18kK94QhSxOmRCRD-hnUqKtAIpfa_UGzFo8kLfVJRwiJqpkPqgFy-YIgwvHOANbe_uew.&URL=http%3A%2F%2Finfo.myfcsfinancial.com%2Fffa-application-download

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Invite a local credit representative to meet with the class to discuss what creditors look for in a customer. Have students prepare a list of questions that they would ask if they were seeking a loan to finance their Supervised Agricultural Experience Program.

Use the website provided above my FCS Financial to complete a sample loan application for your Supervised Agricultural Experience Program using all years’ SAE records. Print application and show to a local loan officer or banker to critique. Share results with the teacher during your next SAE visit.

EvaluationCredit and Loan Info Grams AP6.5

Alternate - Paper-pencil Quiz Evaluation AP6.6

Answers to EvaluationEvaluation AP6.5Answers will vary. Use scoring guide on AP6.5 to assess student work.

Alternate Evaluation AP6.61. A2. A3. D4. D5. A6. I = prt – (i) interest, (p) principal, (r) rate of interest charged, (t) amount of time7. When principal is calculated not only on the principal, but also on the accrued interest8. Paid off in installments over time; Each payment covers current interest and part of

principal9. 12,000 x .07 x .5 = $42010. Loan length = 8 months; $1,541.67 / 8 months = $192.71 per month; $192.71 x 12 =

$2,312.52; $2,312.52 / $25,000 = .0925 = 9.25%11. $50,000 x .08 = $4,000 interest paid in first year; $5,092.61 - $4,000 = $1,092.61


Documents

Missouri FFA and Agriculture Education - Student … Credit an… · Web viewMissouri Personal Finance SI.6 Analyze factors affecting the rate of return on investments (e.g., Rule