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) EAR= [1+ (APR/m)] m-1
National First- EAR: (1-[.0325+.0675]/2)^2 – 1 = 1+ (.1/2) = 1.05^2= 1.1025- 1= .1025 or 10.25% Regions Best- EAR: (1 + [.1317/12] ^12) - 1 = 1.010975^12= 1.13994788- 1= .1399 or 13.99%
2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)
The bank that I would recommend is National First Bank. I would recommend National First Bank over Regions Best Bank because National First has a much lower compounded interest rate. National First has an Effective Annual Rate of 10.25% while Regions Best has an Effective Annual Rate of 13.99%. 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) The monthly payment amount for this loan would be $142,925.09. No, I do not agree with this decision because the amount of the loan is not the amount that AirJet Best Parts, Inc. wishes to obtain. If AirJet accepts this loan, the company will still have to obtain another...