Kim Witten Course Project Part I Task 1 1. National First (Prime rate is 3. 25%) +6. 75% = 10% Semiannually EAR = (1+. 10/2) ^2 – 1 which is 10. 25 Regions Best Rate is 13. 17% Monthly EAR = (1+. 1317/12) ^12 – 1 which is 13. 99 2. I think that between National First and Regions Best that National first offers the lower rate after computing the EAR. National first is also only compounded semiannually making it lower then Regions Best. The only thing I worry about it the prime rate changing because if it rises a lot then it could possibly become a higher interest rate them Regions best. At the time being if Air jets Best Inc. akes the National First option then that is 3. 74 percent less they would be paying if they had gone with Regions Best. This would be the better option because you will pay less interest over time for the loan amount. 3. Loan Amount = $6,950,000 APR = 8. 6% Monthly Interest Rate = 8. 6%/12 = 0. 7167 = 0. 72% Term = 5 years Number of monthly Payments = 60 Monthly Payment = $142,926. 43 I agree with going with the decision because if you compare it to national First interest rate of 10% even though it is compounded semiannually you still will pay less with Regions First who compounds monthly.
The less you can pay in interest over time will be less out of your pocket and the best decision to make in the long run. Task 2 1. Raytheon Dividend: 1. 71 Yield 3. 90% Stock Price: 44. 18 (Dividend per Share/Stock Price)+Growth (1. 71/44. 18)+5 = 8. 87% Boeing Dividend: 1. 68 Yield: 2. 60% Stock Price: 65. 8 (1. 68/65. 8)+5 = 7. 55% Lockheed Martin Dividend: 4 Yield: 5. 40% Stock Price: 76. 52 (4/76. 52)+5 = 10. 23% Northrop Grumman Corporation Dividend: 2 Yield: 3. 50 Stock Price: 57. 18 (2/57. 18)+5 = 8. 50% 2. Required rate of return (Raytheon) = 8. 87% Growth = 1% Dividend per share = 1. 71
D1= D0 x (1-growth rate) = 1. 71 x (1-1%) = 1. 73 Current share price = 1. 73/ (8. 87-1%) = $21. 98 3. Common Stock = $21. 98 Preferred Stock is Dividend per share on preferred/rate of return 1. 50/8. 87 = $16. 91 Common stock is higher at $21. 98 then the preferred stock price of $16. 91. Preferred dividends are generally fixed they can be valued as a constant growth rate of zero. You use the zero growth model for the preferred stock and the assumption that the dividends always stay the same and you use the constant growth model for common stock because the dividend grows by a specific percent a year. . If the amount of the dividends were to increase at the end of the year the common stock amount would increase. If the required rate of return increased the current share price of common stock would decrease. As the stock price increases, the risk becomes higher for investors but they would be willing to pay for the higher price because there is also an expectation that there will be a higher return in dividends. An increase in dividends would make stock higher as investors will see that the stock pays good dividends and they will be willing to pay good money in return for a good payout. Task 3 1.
Annual rate: 7. 50% Current price of bond: $1,062 Term: 20 years Par Value $1,000 Annual Interest: $75. 00 Semi Annual Interest: $37. 50 $1,062 = $37. 50 x 1 – (1 + YTM/2) ^-40 divided by YTM/2 + 1000/1 + (YTM/2) ^40 = 6. 92% 2. A coupon rate is generally fixed and is known as the stated rate of a bond that determines the periodic interest payments. The annual coupon divided by the face value is called the coupon rate of the bond. The YTM rate would be the rate of return the investor would earn or the required rate of return of interest if the bond was purchased at its current market price and held to maturity.
The YTM is also known as the bond yield. This is also the discount rate that is equal to the discounted value of the bond’s future cash flows to its current market price. 3. Certain factors can contribute to the riskiness of bonds such as interest risk and credit risk. The interest risk is resulting from fluctuating interest rates which poses a risk for bondholders because the return they get from the bonds are affected by the sensitivity of the price of bonds to any changes to the interest rate. Credit risk of bonds has a possibility that the bond issuer will default on the bond.
The risk that the bond issuer will default on the bond will mean that the investor’s actual yield will be lower. Other factors that can contribute to the riskiness of bonds are inflation rates and the financial health of the bond issuer. 4. Some positive covenants AirJet could use in future bond issues is maintain a minimum level of net working capital, maintain any and all collateral or security related to the bond indenture as well as all facilities in good working condition. They also must file quarterly audited financial statements and make sure bondholders have access to this information.
They must maintain a certain level of debt coverage ratio as well as allow for redemption in the event of a merger or sale. Some negative covenants that AirJet can have in their future bond issues could be debt limitation, limitation on liens or mergers, consolidations or sales, dividend limitation, or limitations on asset disposal. They cannot pay unusually high dividends and must limit those dividends to a certain amount, they cannot lease or sell off major assets without the approval of the lender, they cannot issue additional debt and they cannot pledge any assets to lenders.