Assessing Loan Options for Airjet Best Parts, Inc.

Ricky Snelling

Week 3: Course Project

Task 1: Assessing loan options for AirJet Best Parts, Inc.

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. (15 pts)

Regions Best

(1+ .1317/12)^12 -1

=0.14

EAR = 14%

National First

(1+ (6.75+3.25)/2)^2 -1

=.1025

EAR = 10.25%

2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)

Based on my calculations I would choose the National First loan because the EAR is only 10.25%. The EAR for the Regions Best loan is 14%. The ideal EAR for the company would be the smallest rate.

3. 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. (20 pts)

Using the PVA equation:

PVA = C({1 – [1/(1 + r)]t } / r)

$6,950,000 = $C[1 – {1 / [1 + (.086/12)]60} / (.086/12)]

Solving for the payment, I got:

C = $6,950,00 / 48.62687

C = $142,925

By taking a smaller amount loan will save them money that they will need to pay back in the end. If they don’t borrow enough they may end up closing because they ran out of money to get their feet off the ground. It all comes down to saving money now and taking that chance of starting quickly, or spending money now to get the factory set up and make money later.

Task 2: Evaluating Competitor’s Stock

AirJet Best Parts, Inc. is concerned regarding recent changes in its stock prices for the company and would like to determine the stock prices for key competitors. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman...