Busn379 Project Part 1

In: Business and Management

Submitted By deeds
Words 1387
Pages 6
Task 1: Assessing loan options for AirJet Best Parts, Inc.
The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks.
Bank | APR | Number of Times Compounded |
National First | Prime Rate + 6.75% | Semiannually |
Regions Best | 13.17 | Monthly |

1. Assuming that AirJet Parts, Inc. is considering loans from National First and Regions Best, what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Board’s website (http://research.stlouisfed.org/fred2/). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations. (15 pts)
A.
National First Bank:

EAR =[ ( 1 +{3% + 6.75%}/2 ) ^2 ]-1
EAR= 9.9%

Regions Best:

EAR =[ ( 1 +13.17%/12 ) ^12 ]-1
EAR =[ ( 1 +0.010975 ) ^12 ] -1

EAR = 13.99%
EAR = 14%

2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)
A. I would recommend National First Bank because the EAR is 9.9% whereas the EAR for Regions Best is 13.99% or 14%. Even if the APR for both banks are the same, National First would still have a lower EAR, the bank is compounded semi-annually opposed to Regions where it is monthly; the greatest frequency of compounding results in the highest EAR.

3. AirJet Best Parts, Inc. has decided to take a $6,950,000 loan being offered by Regions Best at 8.6% APR for 5 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale. (20 pts)
A. PVA=(({1[1/(1+r)]t}/r)
B. 6,950,000=$([1-{1-/[1+(.086/12)]^60}/(.086/12)]
C. 6,950,000/48.62687

The monthly payment amount for this loan would be…...

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