Bus379 Finance Week 3 Assignment
Task 1: Assessing loan options for AirJet Best Parts, Inc.
1.) EAR = Frequency of compounding and the Annual Percentage Rates
EAR = ( 1+ A/ N) N – 1
A = Stated annual interest rate.
N = number of compounding periods
National First (EAR) =
Prime loan rate of 3.25%
EAR = (1 + (6.75+3.25)/2)2 – 1 = 10.25% compounded semi-annually.
Regions Best (EAR) = (1 + 13.17/12)12 – 1 = 14% compounded monthly.
2.) National First Bank would be the best choice. The reason being is that they provide a lower interest rate, which is determined from the solution above.
3.) EAR = ( 1 + 8.6/12)12 - 1 = 8.95% compounded monthly.
Monthly payment = 8.95% of $69,50,000 = $622025 PVA = C({1 – [1/(1 + r)]t } / r) $6,950,000 = $C[1 – {1 / [1 + (.086/12)]60} / (.086/12)] Solving for the payment, we get: C = $6,950,00 / 48.62687 C = $142,925
Task 2: Evaluating Competitor’s Stock
1.) Dividend Growth Rate – 5%
Competitor Dividend Price Rate of Return
Raytheon 2.00 58.05 3.50%
Boeing 1.76 69.85 2.50%
Lockheed Martin 4.00 91.18 4.40%
N.G.C. 2.20 66.94 3.30%
2.) Rate of return to be used = 4.40%
P0 = d0*(1+g) / (re – g) = 1.50 * (1.01) / (0.0440 – 0.01)
3.) Price of preferred stock = 1.50 / 0.0918 = $16.34. The current stock has a higher price than preferred stock.
4.) If the dividends increase, then the price of the stock is going to go up.
If the rate of return increases, it is going to push down the current price of the stock.
If there is a positive change in dividend, then the stock price will increase. If there is a negative change then the stock price will decrease.
Task 3: Bond Evaluation
1.) YTM = 6.92%
2.) Coupon rate is the fixed rate of income, which the bond provides in for the purchase of the bond. YTM rate would be the rate of return the investor would earn. It’s also the annual interest rate, which exists in the market to compare whether the coupon rate, which is being given, is
1.) EAR = Frequency of compounding and the Annual Percentage Rates
EAR = ( 1+ A/ N) N – 1
A = Stated annual interest rate.
N = number of compounding periods
National First (EAR) =
Prime loan rate of 3.25%
EAR = (1 + (6.75+3.25)/2)2 – 1 = 10.25% compounded semi-annually.
Regions Best (EAR) = (1 + 13.17/12)12 – 1 = 14% compounded monthly.
2.) National First Bank would be the best choice. The reason being is that they provide a lower interest rate, which is determined from the solution above.
3.) EAR = ( 1 + 8.6/12)12 - 1 = 8.95% compounded monthly.
Monthly payment = 8.95% of $69,50,000 = $622025 PVA = C({1 – [1/(1 + r)]t } / r) $6,950,000 = $C[1 – {1 / [1 + (.086/12)]60} / (.086/12)] Solving for the payment, we get: C = $6,950,00 / 48.62687 C = $142,925
Task 2: Evaluating Competitor’s Stock
1.) Dividend Growth Rate – 5%
Competitor Dividend Price Rate of Return
Raytheon 2.00 58.05 3.50%
Boeing 1.76 69.85 2.50%
Lockheed Martin 4.00 91.18 4.40%
N.G.C. 2.20 66.94 3.30%
2.) Rate of return to be used = 4.40%
P0 = d0*(1+g) / (re – g) = 1.50 * (1.01) / (0.0440 – 0.01)
3.) Price of preferred stock = 1.50 / 0.0918 = $16.34. The current stock has a higher price than preferred stock.
4.) If the dividends increase, then the price of the stock is going to go up.
If the rate of return increases, it is going to push down the current price of the stock.
If there is a positive change in dividend, then the stock price will increase. If there is a negative change then the stock price will decrease.
Task 3: Bond Evaluation
1.) YTM = 6.92%
2.) Coupon rate is the fixed rate of income, which the bond provides in for the purchase of the bond. YTM rate would be the rate of return the investor would earn. It’s also the annual interest rate, which exists in the market to compare whether the coupon rate, which is being given, is