BUSN379
Course Project 1
TASK 1
Part 1
National First
[1+(6.75+3.25)/2]^2 - 1
=.1025
EAR= 10.25%
Regions Best
(1+ .1317/12)^12 – 1
=0.14
EAR= 14%
Part 2
Based on my calculations I think I would choose the National First loan because the EAR is only 10%. The ideal EAR for the company would be the smallest rate.
Part 3
(1+8.6/12)^12 – 1= 8.95%
Monthly payment 8.95% of 6,950,000 =$622,025
AirJet Best Parts, Inc. took the smaller amount loan and this will save them money that they will eventually need to pay back later on. If they do not borrow enough money they may close because they’ll run out of money.
TASK 2
Part 1
Raytheon Co.
Dividend Amount: 2.36%
Stock Price: $102.50
Growth Rate: 24%
Dividend Paid: 4*2.36% =0.0944
0.0944/102.50 =9.209
9.21+0.24 =9.45%
Part 2
Rate of Return: 9.45%
Growth Rate: 1%
Dividend Paid: $1.50
[$1.50*(1+1%)]/9.45% - 1% =$18.00
Part 3
Rate of Return 9.45%
Dividend Paid $1.50
$1.50/0.0945 =$15.87
I assume the current price to be higher than the preferred price because that would mean the stock is doing better than projected to be at this point in time.
Part 4
If the dividends are increased the price of the stock will rise. If the required rate of return increases then it would lower the current price of the stock. So therefore 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
Part 1
I think AirJet Best Parts should set the coupon rate at 7.5% on its new bonds to sell at par value, equal to the rate of return.
Part 2
The coupon rate is the actually stated interest rate. It is fixed and determines what the bond’s coupon payments will be. This is the rate earned on a NEW issue bond. The yield to maturity takes into consideration the purchase price of a bond bought in the secondary market.
Part 3
The most well-known risk in the bond market is interest rate risk. The risk...