Airjet Best Parts Case Study

Task 1: Assessing loan options for AirJet Best Parts, Inc.
1. MPRIME as of 08/2013 was 3.25%
APR for National First = 3.25% + 6.75% = 10%
APR for Regions Best 13.17%
EAR for National First [(1 = ((10%)/2)) 2-1 = 10.25%
EAR for Regions Best [(1 = ((13.17%)/12)) 12-1 = 13.9947%

1. Based on the information about I would choose National First because of the lower EAR rate of 10.25% and also because the EAR is compounded semiannually making the EAR even lower over Regions Best who had a higher EAR at 13.9947% and compounds the EAR monthly. Based on all of this information I would have to say that National First is the better choice.

2. Loan Amount 6,950,000
APR 8.6%
Interest Rate 0.7167%
Term of Loan 5 years
Monthly Payments = $142,926.43

3.
Based on this new information and the lower rate of 8.6% APR from Regions Best I would agree with the decision to use Regions Best for this loan, even though the rate compounds monthly the rate is still lower than National First at 10.25% and was a better choice.

Task 2: Evaluating Competitor’s Stock
1. Company Name: Raytheon
Stock Price: $80.69
Dividend per Share: $2.20
Dividend Yield: 2.80%
Required Rate of Return ($2.20 / 80.69) + 5% =
7.73%

Rate of return7.73%
Constant growth 1%
Dividend per share 1.50
1.50 * (1 – 1%) = $1.52
$1.52 / (7.73% - 1%) = $22.93

1. Common Stock $22.93
Preferred Stock $1.50 / 7.73% = $19.40

Based on this information the common stock is higher because the preferred dividends are fixed and therefore are calculated with a growth rate of zero.

2. If AirJet Best Parts, Inc. increases dividends the price of common stock will increase however if dividends are increasing investors will see that the company is doing well and will be willing to invest with the expectation that they will receive higher pay outs.

Task 3: Bond Evaluation
With the information given the coupon rate would be 6.92% assuming that

1. The coupon rate is a fixed rate that determines what the interest will be. The YTM on the other hand is the rate the investor earns over the lifetime of the bond.

2. There are several factors that make bonds risky; the first is the default risk this is the risk that the bond issuer will not have the funds to pay the interest or principal on the bond. The second factor is the inflation risk this is the risk that inflation will cause the bonds to louse value and decrease their value; fixed bonds are at the greatest risk from inflation.

3. Some positive covenants would be that AirJet issues reports to shareholders informing them of the company’s financial health and stability, maintaining a set maximum liability level and including a safety net for investors allowing them to recapture some or all of their investment if the company is sold or goes bankrupt.

Some negative covenants would be AirJet is unable to make big decisions without shareholder approval this could include making large purchases or selling company assets, this would in effect stop AirJet from being able to make any major financial decisions without shareholder approval although this would be in the shareholders’ best interests it would also slow down large projects as the shareholders would need to vote.