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

Bank APR
Number of
Times
Compounded
National First
Prime Rate +
6.75%
Semiannually
Regions Best 13.17 Monthly
National First 10.78%
Regions Best 13.99%
$142,925.09
It seems this would be a good loan, since it has an APR much lower than the two offered above.
Task 2: Evaluating Competitors Stock
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.
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
Boards website (http://research.stlouisfed.org/fred2/). Select Interest Rates and then Prime
Bank Loan Rate. Use the latest MPRIME. Show your calculations.
Course Project Part 1
2. Based on your calculations above, which of the two banks would you recommend and why?
Explain your rationale.
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.
I would recommend using National First Bank. The APR is lower and only compounds twice a year,
while Regions Best has a higher interest rate and compounds 12 times a year.
AirJet Best Parts, Inc. is concerned regarding recent changes in its stock prices for the company
and would like to determine the stock prices for key competitors. Key competitors include
Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.
(LMT) P=82.78, D=4.00
R = 4/(82.78 + .05)
R= 4.83%
P=1.5/(4.83-.01)
P= .3112
P = $31.12
P=1.5/(4.90-.01) P=.3067
P=2/(4.83-.01) P=.4149
Task 3: Bond Evaluation
Coupon rate should be 7.5%. Since they want to sell at Par the rate should be the same as YTM.
1. Using the dividend growth model and assuming a dividend growth rate of 5%, what is the rate
of return for one of three key competitors? Use Yahoo Finance to obtain the latest dividend
amount and price for one selected company.
2. Using the rate of return above, what should be the current share price of AirJet Best Parts, Inc.
if the company maintains a constant 1% growth rate in dividends and the most recent dividend per
share paid on the stock was $1.50? Show your calculations.
3. Assume AirJet Best Parts has also a preferred stock issue. The most recent dividend per share
paid on the stock was also $1.50, the same as the common stock. Which one would you think has
a higher price, the preferred stock or the current stock? Explain your rationale.
4. What would happen with the price you computed above if AirJet Best Parts, Inc. announces
that dividends at the end of the year will increase? What if the required rate of return increases?
What changes in dividends will affect the stock price and how?
They would have the same share price since the dividend paid out was the same. Perferred stocks
have a fixed dividend.
If it is announced that dividends will increase, the price of stocks would increase, if RRR increases
then stock prices would decrease.
AirJet Best Parts, Inc. would like to issue 20-year bonds to obtain remaining funds for the new
Mexico plant. The company currently has 7.5% semiannual coupon bonds in the market that sell
for $1,062 and mature in 20 years.
1. What coupon rate should AirJet Best Parts set on its new bonds to sell them at par value?
Default risk would have a major concern as these bonds are for 20 years.
Positive- Maintain its working capital at or above a minimum amount.
Negative- Cannot issue any long term debt.
4. What type of positive and negative covenants may AirJet Best Parts, Inc. use in future bond
issues?
YTM is the rate required in the market on the bond and coupon rate is annual coupon divided by
the face value of the bond. Coupon rate can be greater or less than the YTM.
2. What is the difference between the coupon rate and the YTM of bonds?
3. What factors will contribute to the riskiness of these bonds? Explain in detail your rationale.
Extra Credit