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 dividend growth model and assuming a dividend growth rate of 7%, 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. Answer: Dividend: $1.72

Price: $43.68

Constant Growth Rate: 7%

Required Rate of Return: (Dividend per Share/ Stock Price) + Growth Rate ($1.72/43.68) + .07 = 10.94%

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 3% growth rate in dividends and the most recent dividend per share paid on the stock was $2.70? Show your calculations. Answer: Required Rate of Return = 10.94%

Constant growth Rate in Dividends = 3%

Dividend Per Share = $2.70

D1= D0*(1- Growth Rate) = $2.70* (1-1%) = $2.67

Current Share Price = D1/ (Rate of Return – Growth Rate)

$2.67/ (10.94% - 3%)

Current Share Price = $33.38

3.Assume AirJet Best Parts has also a preferred stock issue. The most recent dividend per share paid on the stock was also $2.70, 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. Answer: Current Share Price (Common stock) = $33.38

Current Share Price (Preferred Stock) = Dividend per shared preferred/ rate of return Current Share Price = $2.70/ 10.94%

Current Share Price(Preferred Stock) = $24.55

Based on answer the stock price of common stock is higher at $33.38 than stock price of preferred stock at $24.55. Since preferred dividends are generally fixed then preferred stock can be valued as a constant growth stock with dividend growth rate of Zero. 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? Answer: If the dividends increase at the end of the year, the current...

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