BUSN379_Course_Project_Part

# BUSN379_Course_Project_Part - 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) The latest MPRIME is 3.25. Therefore the prime rate of National First Bank is 3.25% +6.75%=10% National First Bank: EAR=(1+APR/p)^p-1 =(1+0.1/2)^2-1 =0.1025 Region Best Bank: EAR=(1+APR/p)^p-1 =(1+0.1317/12)^12-1 =0.13995 2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts) I would recommend AirJet to choose National First Bank for their loan. According to the textbook, Effective annual rate (EAR) is the interest rate expressed as if it were compounded once per year. Therefore the lower the EAR, the less interests AirJet needs to pay per year. 3. AirJet Best Parts, Inc. has decided to take a \$6,950,000 loan being offered by Regions Best at 8.6% APR for 5 years. What is the monthly payment amount on this loan? Do you

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## This note was uploaded on 03/18/2012 for the course BUS 379 taught by Professor Jones during the Spring '11 term at DeVry Arlington.

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BUSN379_Course_Project_Part - Course Project Part I Task 1:...

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