Nov 26, 2020 in Coursework

Running head: AIRJET BEST PARTS, INC. PART I 1

AIRJET BEST PARTS, INC. PART I 8

Airjet Best Parts, Inc. Part I

Authors Name

Name Of Institution

Finance

Part 1 Task 1

Assessing available loan options for Air Jets Best Parts Inc.

Q1.

Bank

APR(given)

EAR(calculated)

2nd iconv

term

EFF

National First

3.25 + 6.75=10%

10.25

Nom = 10%

C/Y= 2 (semi-annual)

EFF= 10.2500

Region Best

13.17%

13.99

Nom= 13.17%

C/Y= 12 (monthly)

EFF= 13.9948

Q2. I would recommend the company to take the loan offered by National First as the interest rates are compounded on a half-year basis, making it less than Regions Best. The loan taken from Nations First has an effective annual interest rate of 10.25%, while that of Regions Best is at 13.99%. If AirJets Best Parts takes the loan from Regions Best, it will pay 3.74% higher than what the National First offers.

Q3. Airjet Best Part loan with Regions Best

APR: 8.6% I % yrs. term, loan amount=$6950000

N=12x5=60 months

I= 8.6%/12months= 0.7167

PV= $6950000

PMT=?

FV=?

Hence, the payment will be $142926.43. Therefore, the company has made a good decision to choose the loan option. If this is compared to National Interest at the rate of 10%, compounded semi-annually at the rate of 10% after being compounded semi-annually, the company still pays less that with Region First who has monthly compound program.

Task 2: Evaluating Competitors Stock

The company is concerned with recent changes in its own stock price and would like to determine the stock prices for major competitors. Key competitors in the market are Raytheon, Lockheed Martin, Boeing and Northrop Grumman Corporation.

Key competitors

Latest stock prices($)

Recent per share dividend ($)

Dividend yield($)

Lockheed martin (LMT)

74.50

3.00

4.00

Boeing (BA)

70.07

1.68

2.40

Raytheon (RTN)

50.26

1.50

3.00

NOC

67.23

1.88

2.80

Last updated January 2012

1. Using the dividend growth model assuming a dividend growth of 5%, the rate of return to one of the major competitors is:

Raytheon= 7.98%

Boeing = 7.4%

Lockheed Martin = 9.03%

Northrop Grumman corporation= 7.8%

Solution

Dividend 1=$1.5

P= $ 50.26

Constant growth rate= 5%

The formula

Required rate of return = (dividend per share /stock price) + growth rate

Hence; rate of return = 1.5/50.26 + 5%= 7.98 for Raytheon

2. Using the above rate of return, what should be the current price per share of the company if it maintains a 1% dividend growth rate and the most recent dividend per share paid was $1.5.

Required rate of return for Raytheon = 7.98%

Constant growth rate = 1%

Dividend per share (D0) = $1.5

D1= Dox(1-growth rate) = $1.50x (1-1%) = $ 1.52

Current share ratio = D1/ (rate of return- growth rate) = $1.52/ (7.98%-1%) = $21.69

Using the case of Raytheon Company, the rate of return, the current price per share of AirJet in order to maintain a constant dividend growth rate of 1% at a dividend per share of $1.5 would be $21.69.

3. Which would be the preferred stock issue assuming the recent dividend per share on the stock is $1.50 the same as common stock. Which is the highest price of the current stock or the preferred stock?

Common stock= $21.69

Current share price= dividend per share on preferred / rate of return= $1.50/7.98% = $ 18.79

Based on this information, the stock price of the common stock stands at $21.69 higher than that of the preferred stock at $18.79. The preferred dividends are generally fixed and are valued at a constant growth rate with a dividend rate of zero. To calculate the share price of preferred stock at zero growth models, we assume the dividends remain the same.

Preferred stock provides for fixed dividends that the investor is assured of getting dividends when the company declares. Usually, the price of preferred dividend is higher than that of common stock due to its potentiality for higher gain to investors. Since, preferred stock has higher stock prices, they are more risky to investors but with higher potential for returns.

4. If the dividends increate at year end, the current share price for common stock increases from $21.69 to 21.91. This assumes the same growth rate of 1% with a required rate of return is 7.98% for Raytheons. If the rate of return required increases, the current share price of the shares decreases from $21.69 to $17.

An increase in price of stock presents more risks to investors who are willing to pay higher per share due to the expectations for higher dividend returns. An increase in dividends pushes stock prices up as investors expect the stock pay good dividends.

Task 3: Evaluation of Bonds

1. The company would like to issue 20 year bond to acquire the remaining funds to have the New Mexico plant. AirJet has a 7.5% semi-annual coupon bonds that sells for $1062 maturing in 20 years.

The coupon rate at which the company can sell its bonds at its par value is likely to be 6.92% as shown below:

Annual interest rate 7.50%

Current bond price $1062

Term in years 20

Bonds par value (assumed) #1000

Annual interest $75.00

Semi-annual interest $37.50

$1062=37.5ximage2.png + image4.png

YTM = 6.92%

1000= C (1000) image6.png +image8.png

C(1000) image10.png+image12.png =10.66+262.313 =

C=6.92%

2. Difference between the coupon and the YTM bonds

The coupon rates are generally fixed and the Stated Bonds Rate are determined by the periodic payment of interest. The coupon rate of bond is the value of the annual coupon divided by the face value. The YTM rate remains the rate of return to investors or the required rate of return if the bond is bought at the current market price held until maturity. The YTM value is also called the bond yield which also amounts to the discount rate of the future cash flow of the bond to its current market price.

3. Factors that contribute to the rate of risk to the bonds

The interest rates risk is the fluctuation of interest rates which poses a risk to the bondholders since the return they achieve from the bonds are highly affected by the sensitivity of the bonds price to changes in interest rates. The sensitivity of bond price to interest rates to the risk in interest rates relate to the term of the bonds and the time of maturity and the coupon rate. The longer the term of the bond, the lower is the rate of coupon rate increases the coupon rate to bondholders. When interest rates are rises, this makes the bonds less valuable and the investors run the risk of holding fixed rate bonds. The bonds credit risk poses the possibility of bond issuer defaulting on the bond. The risk that the bond issuer might default the bond means that the actual yield the bod lowers. Factors that contribute to the risk of the bond are inflation, and the financial health of the issuers of bonds.

4. What are the negative and positive covenants of AirJet Best Parts in future bonds?

Positive covenant is the specification of a loan agreement where the firm have to take certain actions whereas; negative covenant is a promise not to take some actions. Both covenants are placed to protect the bond issuers and bondholders interests.

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