project part 1 - Finance course project part 1 Task...

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Finance: course project part 1 Task: Assessing loan options for Air Jet Best Parts, Inc. 1. National First Bank: EAR =[ ( 1 +{3.25 + 6.75%}/2 ) ^2 ]-1 EAR= [(1+10%/2)^2]-1 EAR= [(1.05)^2]-1 EAR=1.1025-1 EAR= 0.1025 EAR= 10.25% Regions Best: EAR =[ ( 1 +13.17%/12 ) ^12 ]-1 EAR =[ ( 1 +0.010975 ) ^12 ] -1 EAR =[ ( 1.010975 ) ^12 ] -1 EAR = 1.13995 - 1 EAR = 0.13995 EAR = 13.995% EAR = 14% 2. Based on my calculations above, I would recommend Regions Best because the EAR is 13.995% or 14%. Whereas the EAR for National First Bank is 10.25% National First Bank is semiannually and although it has a prime rate (which is low); the APR is low as well compared to Regions Best. I would recommend Regions Best with an EAR of 13.995% or 14%. Simply
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because, the effective annual rate is a value used to compare different interest plans, if two plans were being compared, the interest plan with the higher effective annual rate would be considered the better plan. The interest plan with the higher effective annual rate would be the better earning plan. For every compounding interest plan there is an effective annual rate. This effective annual rate is an imagined rate of simple interest that would yield the same final value as the compounding plan over one year. 3. $6,950,000 (loan amount) * 8.6 %( interest rate) / 5(years) $6,950,000* .086 /5 $597,700/5 $119,540 The monthly payment amount for this loan would be 119,540/60 (5*12) = $1992.33, however, I do not agree with this move because, air Jet has the option to take a lower interest rate of 7.65% from first national bank which would bring their monthly payment down from $1992.33 to $938.30, this is a much lower interest rate than the one they chose 1992.33 – 938.30 = 1054.03; $6,950,000 (loan amount) * 6.75% (interest rate) / 5(years) $6,950,000 * 6.75% / (5*2) $469,125 / 10 $46,912.5 / (5*10) $46,912.5 / 50 $ 938.30 Task 2: Evaluating Competitor’s Stock: Lockheed Martin 1. Expected Return = (dividends paid + Capital gain) / price of stock
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(5% * 78.08 = 3.90) ($3.00 + $3.90) * 100 /$78.08 6.90 * 100 / 78.08 8.84% 2. Share Price = (dividends paid + expected price) / expected return ($1.50 + 81.98) / 1+ 0.0884) 83.98 / 1.0884 $76.70 3. The preferred stock would have a higher price because; the reason is the numerator of the equation: dividends. Traditionally, preferred shares offer a higher annual dividend per share over common stock, but there are some draw backs to this privilege. By purchasing preferred shares (which
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This note was uploaded on 09/25/2011 for the course FINANCE Busn379 taught by Professor Anthonypeak during the Spring '11 term at DeVry Decatur.

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project part 1 - Finance course project part 1 Task...

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