No Marshmallows, Just Term Papers
Course Project Part I Tasks 1-3
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.
Bank | APR | Number of Times Compounded |
National First | Prime Rate + 6.75% | Semiannually |
Regions Best | 13.17 | Monthly |
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. MPRIME is 3.25 + 6.75 = 10%
National First- (1+.10/2)^2-1=10.25%
Regions Best- (1+.1317/12)^12-1= 13.99%
2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. National First would be the bank that I would pick based on the interest rate alone. You would pay less interest and more on your principle, and the interest isn’t compounded monthly but semiannually. Also the EAR is lower than Regions Best, by a little more than 3%.
3. 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.
The monthly payment is $147,359.40, the annual payment is $1,768,312.85, this payment broken down is $1,170,612.85 for principle for the first year, and $597,700.00 for interest for the first year. The calculation for the yearly payment is:
Payment in the first year | |
$6950000=C*(1-1/1.086^5)/.086 | |
$=C* (1-.3380)/.086 | |
$1,768,312.85 | C=6950000/3.9303 |
The interest for...