Introduction
The Project is an opportunity for you to apply concepts learned to a real-life simulation experience. During the Course Project, you will
suppose that you work as a financial analyst for AirJet Best Parts, Inc. The 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 buying a new machine. You will base your recommendation on the Net Present Value (NPV) of the capital investment project by using the cost of capital (WACC) as your discount rate.
About AirJet Best Parts, Inc.
AirJet Best Parts, Inc. is a company dedicated to design and manufacturing of aviation and airplane technologies and parts. The company has commercial and military clients worldwide.
Task 1: Assessing loan options for the AirJet Best Parts, Inc.
The company require finance $8,000,000 for a new factory in the Mexico. The funds will be obtained by a commercial loan and through 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% Semi-annually
Regions Best 13.17 Monthly
1. Supposing that AirJet Parts, Inc. is considering loans from the 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 (https://research.stlouisfed.org/fred2/). Choose “Interest Rates” and then “Prime Bank Loan Rate”. Use the newest MPRIME. Show your computation.
Use formula: EAR = (1+quoted rate/m)little m -1
3% is prime + 6.75%
2. Based on your computation above, which of the two banks would you suggest and why? Elucidate your rationale.
3. AirJet Best Parts, Inc. has decided to acquire a $6,950,000 loan being offered by the Regions Best at 8.6% APR for 5 years. What is monthly payment amount on this loan? Do you agree with this judgment? Elucidate your rationale.
Task 2: Evaluating Competitor’s Stock
AirJet Best Parts, Inc. is concerned regarding recent changes into its stock prices for the company and would like to find out 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 supposing a dividend growth rate of 5%, what is the rate of return for one of three key competitors? Use Yahoo Finance to acquire the latest dividend amount and price for one selected company.
2. Using the rate of return above, what must be the current share price of AirJet Best Parts, Inc. if the company maintains a steady 1% growth rate in the dividends and the most recent dividend per share paid on the stock was $1.50? Show your computation.
3. Suppose AirJet Best Parts has also a preferred stock issue. The most recent dividend per share paid on stock was also $1.50, same as the common stock. Which one would you believe has a higher price, the preferred stock or the current stock? Elucidate your rationale.
4. What would happen with the price you calculated above if AirJet Best Parts, Inc. announces that dividends at the ending of the year will raise? What if the required rate of return increases? What changes in dividends will affect stock price and how?
Task 3: Bond Evaluation
AirJet Best Parts, Inc. would like to issue 20-year bonds to get remaining funds for the New Mexico plant. The company currently has 7.5% semiannual coupon bonds in market that sell for $1,062 and mature in 20 years.
1. What coupon rate must AirJet Best Parts set on its new bonds to sell them at par value?
2. What is the differentiation between the coupon rate and the YTM of bonds?
3. What factors will contribute to riskiness of these bonds? Elucidate in detail your rationale.
4. What type of positive and negative covenants might AirJet Best Parts, Inc. use in future bond issues?