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Course Project Part 1

In: Business and Management

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Course Project Part 1

Task 1: Assessing loan options for AirJet Best Parts, Inc.

(1) EAR of National First Bank loan is 10.25%. APR = 3.25 (Prime Rate) + 6.75 M = 2 (Compounded semiannually) Formula: EAR = (1+APR/M)^M – 1 Solution: 0.1025 = (1+.10/2)^2 – 1

EAR of the Regions Best Bank loan is 13.99%. APR = 13.17 M = 12 (Compounded monthly) Formula: EAR = (1+APR/M)^M – 1 Solution: 0.1399 = (1+.1317/12)^12 – 1

(2) I recommend using National First Bank because the APR and the EAR are lower than Regions Best, which will result in paying back less interest over the course of the loan.

(3) The monthly payment amount of the loan is $147,357.20. I agree with this decision because APR and EAR would be lower than National First resulting in paying back less interest over the duration of the loan. I got this answer with the following information and formula in Excel: PV= $6,950,000 r= 8.6% =PMT(rate,nper,PV,FV) m= 5 (years)

Task 2: Evaluating Competitor’s Stock

(1) The competitor I chose is Raytheon and the rate of return assuming the dividend growth rate is 5% would be 7.57%. Raytheon’s latest dividend amount was obtained from Yahoo Finance and used with the following formula. g = 5% R = ? D1 = 2.2 (dividend amount) P0 = $85.28 (stock price) Formula: R = D1/P0 + g Solution: R = 2.2/85.28 + .05 = .0757 = 7.58%

(2) Current share price of Air Jet Best Parts, Inc. is $23.06. Rate of return is 7.58% Constant growth rate is 1% R = 7.58% g = 1% D0 = $1.50 (dividend per share) Formula: ^P0 = D0(1+g)/R- Solution: ^P0 = $1.50(1+.01)/.0757-.01 = $23.06

(3) Between AirJet Best Part’s two options of stock, current stock and preferred stock, the current stock has a higher price. The current stock share price is $23.06 and the preferred stock price is $19.82. D…...

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