BUSN379 COURSE PROJECT PART 1 About AirJet Best Parts, Inc.

Course Project – Part I
Introduction
The
Course Project is an opportunity for you to apply concepts learned to a
real-life simulation experience. Throughout the Course Project, you will assume
that you work as a financial analyst for AirJet Best Parts, Inc. The Course
Project is provided in two parts as follows:
Part
I – In Part I, you work with AirJet Best Parts, Inc. staff to identify the best
loan options, as well as to valuate stocks and bonds.
Part
II – In Part II, you will provide the company with a recommendation for
purchasing a new machine. You will base your recommendation on the Net Present
Value (NPV) of the capital investment project using the cost of capital (WACC)
as your discount rate.
About AirJet Best Parts, Inc.
AirJet
Best Parts, Inc. is a company dedicated to the design and manufacturing of
aviation and airplane technologies and parts. The company has commercial and
military clients worldwide.
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 (.stlouisfed.org/fred2/”>http://research.stlouisfed.org/fred2/). Select “Interest Rates”
and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations.
(15 pts)

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

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. (20 pts)
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 Corporation.
1.
Using
the dividend growth model and assuming a dividend growth rate of 5%, what is
the rate of return for one of three key competitors? Use Yahoo Finance to
obtain the latest dividend amount and price for one selected company. (15 pts)

2.
Using
the rate of return above, what should be the current share price of AirJet Best
Parts, Inc. if the company maintains a constant 1% growth rate in dividends and
the most recent dividend per share paid on the stock was $1.50? Show your
calculations. (10 pts)

3.
Assume
AirJet Best Parts has also a preferred stock issue. The most recent dividend
per share paid on the stock was also $1.50, the same as the common stock. Which
one would you think has a higher price, the preferred stock or the current
stock? Explain your rationale. (5 pts)

4.
What
would happen with the price you computed above if AirJet Best Parts, Inc.
announces that dividends at the end of the year will increase? What if the
required rate of return increases? What changes in dividends will affect the
stock price and how? (10 pts)
Task 3: Bond Evaluation
AirJet
Best Parts, Inc. would like to issue 20-year bonds to obtain remaining funds
for the new Mexico plant. The company currently has 7.5% semiannual coupon
bonds in the market that sell for $1,062 and mature in 20 years.
1.
What
coupon rate should AirJet Best Parts set on its new bonds to sell them at par
value? (10 pts)

2.
What
is the difference between the coupon rate and the YTM of bonds? (10 pts)

3.
What
factors will contribute to the riskiness of these bonds? Explain in detail your
rationale. (20 pts)

4.
What
type of positive and negative covenants may AirJet Best Parts, Inc. use in
future bond issues? (10 pts)