Bus 379 Week 3 Course Project Part 1

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.

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)

With the Prime Rate at 3%

NF: 1 + ( 3% + 6.75% ) / 2]^2 - 1 = 9.9%

RB: ( 1 + 13.17% / 12 )^12 - 1= 13.99%

1. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)
   

National First

1. 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 agree with this decision? Explain your rationale. (20 pts)

The monthly payment amount would be $142,925. In truth, it’s actually a bit cheaper than the average rate of interest expected from either bank, so the loan itself isn’t much of a drawback for AirJet.

Task 2: Evaluating Competitor’s Stock

AirJet Best Parts, Inc. is concerned regarding recent changes in its stock prices for the company and would like to determine 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 assuming a dividend growth rate of 5%, what is the rate of return for one of three key competitors? Use Yahoo Finance to obtain the latest dividend amount and price for one selected company. (15 pts)

Going of the examples I’ve read, I will assume the stock price of Boeing to be $50.

[ ( $2x1.05 ) / $50 ] + 0.05 = ( $2.10 / 50 ) + .050 = .042 + .050 = .092 = 9.2%

1. Using the rate of return above, what should be the current share price of AirJet Best Parts, Inc. if the company maintains a constant 1% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50? Show your calculations. (10 pts)
   

( 1.50 x 1.01 ) / ( 0.092 - 0.01 ) = 1.515 / .082 = $18.48

1. Assume AirJet Best Parts has also a preferred stock issue. The most recent dividend per share paid on the stock was also $1.50, the same as the common stock. Which one would you think has a higher price, the preferred stock or the current stock? Explain your rationale. (5 pts)
   

The current stock can grow over time because of the dividend, which the preferred stock only has fixed (making it the safer of the two, but less a chance of a higher profit).

1. What would happen with the price you computed above if AirJet Best Parts, Inc. announces that dividends at the end of the year will increase? What if the required rate of return increases? What changes in dividends will affect the stock price and how? (10 pts)

If the dividends increase then the value of the stock will increase with it, whereas the ROR increasing would reduce the value.