Course Project – Part 1
Task 1: Assessing loan options for AirJet Best Parts, Inc. 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. Answer: National First Bank (Prime Rate 7,75% )

EAR = [(1+ ((7.75%)/2))^2 – 1
EAR = 7.90%
Regions Best
EAR = [(1+ ((13.42%)/12))^12- 1
EAR = 13.99% (14%)
2.Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. Answer: Based on calculations above, I would recommend borrowing from National First Bank. This is because prime rate 3.25%, and 6.75% EAR of national first bank is only 10.25% Vs Regions best is higher 13.99%(14%). National First Bank is semiannually and although it has a prime rate low, the APR is low as well compared to Regions Best. 3.AirJet Best Parts, Inc. has decided to take a $8,100,000 loan being offered by Regions Best at 9.2% APR for 5 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale. Answer:

Loan: $8,100,000
APR: 9.2%
Terms Of loan = 5 Years
Months = 60
FV = $0
Monthly Payment (PMT) = $168,930
Air Jet made right Decision to get loan from Region Best because its monthly payment would be lower at $168,930 based on the APR of 9.2% compounded monthly. I agree with my decision, because based on high APR 9.2% and high loan amount, I get fair monthly payment.

Task 2: Evaluating Competitor’s Stock
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. 1.Using the...

...CourseProject Part II
Introduction
You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5).
Task 4. Capital Budgeting for a New Machine
A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:
Year 1 $1,100,000
Year 2 $1,450,000
Year 3 $1,300,000
Year 4 $950,000
You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000.
1. What is the project’s IRR? (10 pts)
Answer:
Irr=iL+[(iU-iL)(npvL)]/[npvL-npvU]
Irr=0.19+[(0.24-0.19)(193484.61)]/[193484.61-86216.77]
Irr=0.19+[(0.05)(193484.61)]/[279701.38]
Irr=0.19+9674.2305/279701.38
Irr=0.19+0.0346
Irr=0.22446 or 22.46%
2. What is the project’s NPV? (15 pts)
Answer:
1,100,000/(1+0.15)^1=1,100,000/1.15=$956,521.74
1,450,000/(1+0.15)^2=1,450,000/1.3225=$1,096,408.32
1,300,000/(1+0.15)^3=1,300,000/1.52087=$854,771.10...

...CourseProject Part II
Introduction
You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The
company is considering a capital investment in a new machine and you are in charge of making a
recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the
firm’s cost of capital (Task 5).
Task 4. Capital Budgeting for a New Machine
A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new
machine that will increase the production of a special component significantly. The anticipated
cash flows for the project are as follows:
Year 1 $1,100,000
Year 2 $1,450,000
Year 3 $1,300,000
Year 4 $950,000
You have now been tasked with providing a recommendation for the project based on the results
of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial
cost of the machine is $3,000,000.
Required rate of return 15%
Year Cash Flow
0 $ (3,000,000)
1 $ 1,100,000
2 $ 1,450,000
3 $ 1,300,000
4 $ 950,000
1. What is the project’s IRR? (10 pts) = 22.38%
2. What is the project’s NPV? (15 pts) = $450,867.00
Computation of Net Present Value
Year Cash Flow Present Factor
@ 15%
Present
Value
1 $ 1,100,000 0.8696 $ 956,522.
2 $ 1,450,000 0.7561 $1,096,408.
3 $ 1,300,000 0.6575 $854,771.
4 $ 950,000 0.5718 $543,166.
Total = $3,450,867.
Less: Initial cost = $(3,000,000)
NPV...

...be used assuming that payments were made on time.
2. Assuming that the market value weights of these capital sources are 30% bonds, 60% common equity and 10% preferred equity, what is the weighted cost of capital of the firm? (10 pts)
Capital Structure | Weight | Cost | Weight*cost |
Bond | 30% | 3.63% | 1.089% |
Common Equity | 60% | 7.16% | 4.296% |
Preferred Stock | 10% | 5.86% | 0.586% |
Weight cost of capital | | | 5.971% |
3. Should the firm use this WACC for all projects? Explain and provide examples as appropriate. (10 pts)
Yes, because WACC is by companies for performance evaluation and planning purposes. If the weights were changed then the company would have to make the required changes to yield the proper calculations.
(Weighted Average Cost of Capital (WACC), 2013)
4. Recompute the net present value of the project based on the cost of capital you found. Do you still believe that your earlier recommendation for accepting or rejecting the project was adequate? Why or why not? (5 pts)
Year | Cash Flow | Present Factor | Present Value |
1 | $1,100,000 | 0.9437 | $1,038,020 |
2 | $1,450,000 | 0.8905 | 1,291,201 |
3 | 1,300,000 | 0.8403 | 1,092,401 |
4 | 950,000 | 0.7930 | 753,313 |
| | Total | 4,174,935 |
| | | |...

...CourseProject – Part I
You must show all work and calculations by typing out the longhand formula, or post a screen shot of any online calculator used, or attach an excel file showing formulas/calculations in order to earn any credit
Introduction
The CourseProject is an opportunity for you to apply concepts learned to a real-life simulation experience. Throughout the CourseProject, you will assume that you work as a financial analyst for AirJet Best Parts, Inc. The CourseProject is provided in two parts as follows:
Part I – In Part I, you work with AirJet Best Parts, Inc. staff to identify the best loan options, as well as to valuate stocks and bonds.
Part II – In Part II, you will provide the company with a recommendation for purchasing a new machine. You will base your recommendation on the Net Present Value (NPV) of the capital investment project using the cost of capital (WACC) as your discount rate.
About AirJet Best Parts, Inc.
AirJet Best Parts, Inc. is a company dedicated to the design and manufacturing of aviation and airplane technologies and parts. The company has commercial and military clients worldwide.
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....

...Task 2: Evaluating Competitor’s Stock
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.
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. (15 pts)
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. (10 pts)
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. (5 pts)
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? (10 pts)
Task 3: Bond Evaluation
AirJet Best Parts, Inc. would like to issue 20-year bonds to obtain remaining funds for the new Mexico...

...unexpected news and events.
INCORRECT stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets.
stock prices will only change when an event actually occurs, not at the time the event is anticipated.
Instructor Explanation: (Chapter 10, Page 327-330)
Points Received: 0 of 3
Comments:
3. Question :
(TCO 8) Which of the following statements is false regarding systematic risk? Select all that apply:
Student Answer: INCORRECT is always diversifiable
INCORRECT is the total risk associated with surprise events
INCORRECT affects only a specific project or firm
CORRECT is measured by standard deviation
Instructor Explanation: (Chapter 11, Pages 347, 350-355)
Points Received: 1 of 4
Comments:
4. Question :
(TCO 8) Assume a project that has the following returns for years 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximate expected return of this investment?
Student Answer: CORRECT 11%
INCORRECT 17%
16.60%
10%
Instructor Explanation: (Chapter 11, Pages 340-341, Answer: [(15%+4%-13%+34%+17%)/5=11.4%])
Points Received: 0 of 3
Comments:
5. Question :
(TCO 8) Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two-security portfolio that will have an expected return of 12%....