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Finance Project 1 - Igor Kukharenko Finance BUSN379 Anthony...

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Igor Kukharenko Finance BUSN379 Anthony Peak 03/16/2011 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 3.25% 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 1
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( http://research.stlouisfed.org/fred2/ ). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations. (15 pts) The EAR for National First is: (1+0.10/6) ^6-1= 0.1042 or 10.42% EAR The EAR for Regions Best is: (1+0.1317/12) ^12-1= 0.1399 or 13.99% EAR 2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts) According to my calculation above I would recommend National First bank for Financing because their rate is not as high as Regions Best. This will affect interest expense in the company’s financial reports and save money for the Air Jet Parts, Inc. When we look at National First we can see that their interest rate
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