March 20, 2013
Course Project, part one
Task One: AirJet Best Parts
1.National Bank’s APR is the prime rate plus the 6.75% and the number of times it’s compounded is Semiannually. Going to the website, we see that the prime rate is 3.25%. So adding that to 6.75%, we get 10%. So the rate is 10% paid semiannually, which is twice a year at 6 months. To get the EAR, we will divide 10% by 2, then add one, all raised to the second power, then subtract one. The EAR is 10.25%. We look at the EAR because it shows us what we are actually paying in comparison to just the APR. The equation is show in appendix A. We are comparing this bank to Regions Best. They have an APR of 13.17, which at glance is higher than that of National’s Best. They are compounded monthly, which is 12 times a year. This equation is 13.17% divided by 12; add one, raised to 12, minus one. The EAR for this bank is 13.99%, which is higher than National Bank. This is shown in appendix A.
2.Out of the two banks above, I would choose the National First Bank. They offer a lower EAR. Thus during the lifetime of the loan there will be less accrued interest than with the other bank. Even First National’s APR was lower than Regionals Best. This choice would reduce the amount of debt for the company. A company would want a lower EAR because it is actually what they are paying.
3.The monthly payment amount on this loan would be $142, 925.09. This is being shown by putting in the loan amount of $6,950,000 with and APR interest of 8.6% and loan term of 5 years into a loan calculator. The results are shown in appendix B. I agree with the decision to go ahead with this loan, but I feel it would depend on what the other bank would offer as well. It seemed Regional bank lowered their APR when going from the principle amount of $8,000,000 to $6,950,000. So since First National had a lower APR to begin with, I would check to see if they would offer a lower APR than 8.6% of which Regional is offering.
Task Two: Competitors Stock
1.Going to Yahoo Finance, we see that Raytheon is selling for $57.00 in stock price. To get the rate of return, we need the stock price ($57.00), the annual dividend payment of $2.00 listed and the dividend growth which is listed as 3.5%. From this we can see the required rate of return is 7.01%, which is show in Appendix C.
2.The rate from above is 7.01% for Raytheon. With a constant growth rate of 1% in dividends and dividend per share is $1.50, we get a price of the Airjet Best Parts stock price of $50.17. The calculation for this is in appendix D.
3.Common stock price is going to be higher because the common stock dividend is increasing with a growth rate of 1%. The price for common stock is $50.17. We calculate the common stock price by taking the dividend of the preferred stock of $1.50 dividing by the required rate of return of 7.01%. We see that common stock is higher. This is shown in Appendix E.
4.If the company decides to increase the dividends at the end of the year then the price of the stock would go up as it will attract the investor with more return. But if the rate of return increases then price of the stock will go down. Increase in dividend increases the stock price where decrease tends to decrease the stock price. This can be proved with dividend growth model where dividend growth is directly proportional to the stock price.
Task three: Bond Evaluation
1.For selling the bond at par the company should set the coupon rate at the current YTM of 7.5% semiannual. The coupon rate is normally found by taking the annual coupon and divided by the face value. This is expressed in a percentage.
2.Coupon rate indicates the interest payment every year on the bond whereas the Yield to Maturity is the yield an investor can get form the bond at the current point in time. The coupon rate is the rate of interest...