2. TABLE OF CONTENTS
OVERVIEW OF PROPOSAL..................................................................................................... 3
CALCULATIONS ........................................................................................................................ 3
RISK EXPOSURE ........................................................................................................................ 4
REPAYMENT TERMS ............................................................................................................... 4
APPENDIX 1: DETAILS OF CURRENT 401(K) LOANS ..................................................... 6
APPENDIX 2: ALLOCATION OF FUNDS WITHIN THE 401(K) ...................................... 7
3. Overview of Proposal
Jeffrey Allen is seeking a loan for $21,577.00 that will be used to payoff two existing loans from
a company-provided 401(k) program. Payoff of these loans will then allow for a new loan to be
taken out that would provide equity for a new business, repair a leaking roof, and repay the
obligation of this proposal.
Mr. Allen has been employed by Caterpillar since July 2000 and has contributed to a company-
provided 401(k) program. The program allows an employee to borrow against the equity in the
fund in the form of a loan. An employee may make up to two loans with a cap of 50% of the
total equity or $50,000 whichever is lesser. Repayments are made via payroll deduction.
Mr. Allen took out a loan in August 2007 for the amount of $14,344.00 at an interest rate of
9.25% and a second loan in May 2008 for the amount of $17,550.00 at an interest rate of 6.25%.
Appendix 1 summarizes the current monthly payments, remaining amounts on the loans, and
other pertinent information.
The total payoff amount of both loans is $21,577.00. The current balance in the 401(k) fund, as
of August 18, 2009, is $45,871.66. Repayment of the loans before September 25, 2009, would
allow for a new loan of approximately $35,000 to be taken on October 1, 2009. The details of
this calculation are provided in subsequent sections.
Mr. Allen is prepared to pay interest for the use of funds.
Calculations
The current balance, as of August 18, 2009, is $45,871.66. Mr. Allen takes advantage of a 100%
company-match contribution up to 6% of his monthly salary. The 6% contribution equals
$481.08. The combined payment for both current loans is $668.59 each month. Thus, each
month results in an increase of $1630.75 to the 401(k) balance.
If the loans are repaid before September 25, 2009, and assuming no change in the value of the
fund because of market fluctuations, the balance would be $70710.16 (see Table 1).
Table 1: Potential Balance on September 30, 2009 (assumes no change in fund equity)
Balance as of August 18, 2009 $ 45,871.66
+ August Contributions $ 1,630.75
+ September Contributions $ 1,630.75
+ Loan Repayment $ 21,577.00
$ 70,710.16
4. On October 1, a new loan could be taken out for 50% of the value in the fund, or approximately
$35,000. The funds are sent via direct deposit to a checking account with an estimated
turnaround time of seven days.
Risk Exposure
Appendix 2 lists the current allocation of funds within Mr. Allen’s current 401(k) program. The
money is allocated primarily among two funds: 37% in a stable principal fund and 53% in
Caterpillar stock. This current distribution has successfully taken advantage of the recent upturn
in price of Caterpillar stock while setting aside a significant portion to prevent losses in the event
of a market downturn.
Mr. Allen’s current assignment at Caterpillar requires him to monitor commodity markets and
the general business climate. Many theories exist as to whether the economy – and particularly
the stock market – will continue to gain or if the market is set to fall again.
The stock market bottomed in early March and Caterpillar hit a low of $21.71 around that time.
Most people do not feel that the market will revert back to those levels. However, Table 2 shows
what affect a $20/share price decrease would do to the fund balance.
Table 2: Affect of $20/share decrease in Caterpillar Stock Price
Balance as of August 18, 2009 $ 45,871.66
+ August Contributions $ 1,630.75
+ September Contributions $ 1,630.75
- Cat stock drop of $20/share $ (10,728.81)
+ Loan Repayment $ 21,577.00
$ 59,981.35
This assumes that the other funds in the program would not drop as well. It also assumes that if
market momentum swung negative that no corrective action would be taken to reallocate funds
from the Caterpillar stock fund to the stable principal fund (which, in reality, would happen).
In the scenario presented in Table 2, a new loan could be taken on October 1 for essentially
$30,000. This would still allow Mr. Allen to repay the obligation requested in this loan as well
as have enough money to do the desired roof repairs.
Repayment Terms
The obligation requested here would be satisfied within approximately a week from October 1,
2009. The settlement could be handled in one of two ways. On option would be for Mr. Allen to
request the new 401(k) loan, have the funds routed to his checking account via direct deposit,
and then issue a cashier’s check for repayment of this obligation. A second option would be for
the obligator to provide his/her banking data and the loan proceeds be direct deposited to that
account with a subsequent cashier’s check presented to Mr. Allen for the difference between the
5. new loan request and the $21,577 (plus interest). The former option is preferred. The latter
option ensures that the obligation is paid. However, Hewitt – the manager of the 401(k) program
– may have requirements that the funds be sent directly to Mr. Allen’s account. If so, the latter
option would not be possible.
Uses of the Proceeds from the New 401(k) Loan
From the data in Table 1, approximately $35,000 will be available for a new loan. The first use
of this money will be to repay this obligation. The second use will be to install a new roof at Mr.
Allen’s residence at 3519 NE Madison in Peoria, Illinois. Mr. Allen has received four estimates
over the last three years that have ranged from $6,000 to $10,000 for removal of the current roof
and installation of a new one. The remaining money will be used for the following items:
startup of a part-time business (including the purchase of the SEEK program from Nouveau
Riche), marketing and production of Mr. Allen’s first music recording, and to cover the lost
revenue from not teaching in the Fall Quarter, 2009 (Mr. Allen is currently a part-time instructor
of mathematics at Robert Morris University. Each course pays $1500. They do not plan to offer
math courses in the Fall quarter). Table 3 summarizes this breakdown.
Table 3: Use of Funds from New 401(k) Loan
New 401(k) Loan proceeds $ 35,000.00
- Repayment of loan $ (21,577.00)
- New roof $ (8,000.00)
- Business startup costs $ (2,000.00)
- Marketing and Production of CD $ (1,500.00)
Funds to cover lost revenue $ 1,923.00
The new business startup has the potential to earn as much as $12,000 within seven months. For
the music cd opportunity, Mr. Allen has already identified 65 potential leads. The costs of
production are based on quotes from Disc Makers, located in Chicago. The estimated profit
margin per disk is $8/disc. Initial estimates are that an additional 150 units would need to be
sold to break-even. Mr. Allen has a good relationship with a former record-store owner in
Cincinnati, Ohio, who will help with the marketing and distribution.
6. Appendix 1: Details of Current 401(k) Loans
Details of the two 401(k) loans (as of August 18, 2009)
Loan 1
Date of loan May 2, 2008
Original amount $17,550.00
Remaining amount $13,422.72
Monthly payment $ 356.66
Interest rate 6.25%
Last payment on July 31, 2009
Scheduled payoff on January 31, 2013
Loan 2
Date of loan August 20, 2007
Original amount $14,344.00
Remaining amount $ 9,215.39
Monthly payment $ 311.93
Interest rate 9.25%
Last payment on July 31, 2009
Scheduled payoff on May 31, 2012
7. Appendix 2: Allocation of Funds within the 401(k)
Data as of August 18, 2009
Fund Balance 2009 RoR
Model Portfolio - Aggressive $ 269.58 29.0%
Stable Principal Fund $ 17,039.96 30.0%
US Equity Broad Index Fund $ 816.34 28.6%
Large Cap Blend Equity Fund $ 274.08 29.3%
Large Cap Value Equity Fund $ 279.91 31.8%
Large Cap Growth Equity Fund $ 273.28 33.2%
Mid Cap Equity Fund $ 349.52 35.9%
Small Cap Equity Fund $ 359.85 42.5%
International Equity Fund $ 2,010.30 30.0%
Caterpillar Stock Fund $ 24,198.84 16.2%
Total $ 45,871.66 15.5%
The Caterpillar stock fund balance equates to 536.4407 shares of Caterpillar stock valued at
$45.11 (closing price on August 18, 2009
