BUSN 379 Project Part 1 v3

# BUSN 379 Project Part 1 v3 - Course Project Part I Task 1...

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Course Project – Part I 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://research.stlouisfed.org/fred2/ ). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations. (15 pts) EAR Calculation for National First Bank EAR = [ (1+i/n)^n ] - 1 EAR = [ (1+0.1000/2)^2 ] - 1 EAR = 10.25% EAR Calculation for Regions Best Bank EAR = [ (1+i/n)^n ] - 1 EAR = [ (1+0.1317/12)^12 ] - 1 EAR = 13.99% 2. Based upon my calculations, I would recommend financing the \$8,000,000 for the new factory in Mexico with a loan from National First Bank. The loan has a lower effective annual rate and, by proxy, a lower weighted average cost of capital. The lower interest payments on the loan from National First Bank make the loan cheaper to pay back for the firm. 3. If AirJet Best Parts decided to take out \$6,950,000 loan with a 8.6% APR for 5 years, with Regions Best Bank, the monthly payments would be \$142,925.09 a month. I do not agree with the decision to finance the loan with Regions Best Bank. The monthly payments are too high. In addition, the firm needs \$8,000,000 to finance the entire 1

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balance of the new factory. This loan only covers part of the cost; while the firm must
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BUSN 379 Project Part 1 v3 - Course Project Part I Task 1...

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