Course Project – Part I

Task 1: Assessing loan options for Air Jet 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 Air Jet 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. (25 pts.)

Bank Prime Loan Rate as of Jan 26, 2013 – 3.25% according to the Federal Reserve Bank of St. Louis.

National First - EAR
EAR = (1+(Prime Rate +6.75%)/2)^2-1
EAR = (1+(3.25% + 6.75%)/2)^2–1
EAR = (1+.10/2)^2–1
EAR = (1.05)^2-1
EAR = 1.1025-1
EAR = .1025
EAR = 10.25%

Regions Best - EAR
EAR = (1+13.17%/12)^12-1
EAR = (1+0.010975)^12-1
EAR = (1.010975)^12-1
EAR = 1.13995-1
EAR = 0.13995
EAR = 13.995%
EAR = 14%

2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (25 pts.)

I would suggest that Jet Air go with National First to get their loan. I say this because of the lower EAR. There is a significant difference on the EAR between the two banks. Also, since the EAR is compounded semiannually verses it being done on a monthly basis would be another reason for me suggesting to go to National First over Regions Best.

Task 2: Evaluating Competitor’s Stock

Air Jet Best Parts, Inc. is concerned regarding recent changes in its stock prices for the company and