# Fianance 1.Calculate the EAR for two banks (20 pts), make a recommendation to the best option (20 pts) and compute payments for the selected loan 2.Calculate the value of the stock using the dividend...

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Fianance

1.Calculate the EAR for two banks (20 pts), make a recommendation to the best option (20 pts) and compute payments for the selected loan

2.Calculate the value of the stock using the dividend growth model (25 pts). Address the impact of changes in certain variable conditions on market prices (15 pts).

3.Determine the coupon rate of bonds and compare it to the market price (20 pts). Explain factors affecting bond risk (20 pts). Describe some covenants associated with bonds (10 pts).

Answered Same DayDec 20, 2021

## Solution

David answered on Dec 20 2021
Course Project – Part I Introduction The Course Project is an opportunity for you to apply concepts learned to a real-life simulation experience. Throughout the Course Project, you will assume that you work as a financial analyst for AirJet Best Parts, Inc. The Course Project 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. 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:
esearch.stlouisfed.org/fred2/). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations. (15 pts)
Answer:
National First
APR = 3.25% + 6.75% = 10%
EAR = (1 + APR/m) m – 1
= (1 + 0.10/2)2 – 1
= (1.05)2 – 1
= 0.1025 or 0.125%
Region best
APR = 13.17%
EAR = (1 + APR/m) m – 1
= (1 + 0.1317/2)2 – 1
= (1.1317)2 – 1
= 0.139947 or 13.9947%
2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)
Answer:
From the two banks, I would recommend to bo
ow from National First. It is because the effective annual rate of National First is 10.25% which is lower than effective annual rate of Region Best with 13.9947%. If the APR of both the banks is same, I would recommend National First because it will have lower EAR since it is compounded semi-annually compared to Region Best which is compounded monthly. Higher the frequency of compounding, higher the effective annual arte (EAR).
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)...
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