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AirJet Best Parts - Coursework Example

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AirJet Best Parts

The interest payments would be lower with National First. Hence, the loan should be taken from them. 3. The interest payment that AirJet Best Parts Inc. has to make is: Yes, I agree with the decision as the effective annual interest rate is lower than National First. The interest payment till the end of the term would be lower in comparison to the deal offered by National First. Task 2: Evaluating Competitor’s Stock 1. Rate of return is calculated for Raytheon Boeing and dividend stated is annualized. Price of Raytheon Boeing’s share is $65.38 and Dividend annualized is $1.68 which is given out quarterly as $0.42/share. 2. g=1% r=7.7% D=$1.5 3. Common stock will have a higher price than preferred stock because preferred stock pays a fixed dividend and tend to fluctuate in price far less than common shares. This means that preferred stock is comparatively less risky than common share therefore; the return offered on it will automatically be lower as compared to common shares. Common stock on the other hand, is entitled to high variance in price which means that it carries higher risk than preferred shares. Therefore, a common stock holder will demand a higher return to accept the given risk in the stock. Another reason of higher price for a common stock is the dividend growth. We know that the price of a share is the sum of all future cash flows associated with the stock. Therefore, if the company has high dividend growth then ultimately the cash flows of that stock will augment with each year and the sum of cash flows would inevitably increase. This would eventually lead to higher prices as compared to fixed dividend yielding preferred stock. 4. Price of a share is the sum of all future cash flows discounted to present value. Therefore, if there is any anticipated increase in the future cash flow then a subsequent effect in the price of the stock is expected. Therefore, if AirJet Best Parts, Inc. announces that dividends at the end of the year will increase then the price of the stock will also increase. Required rate of return is the return, expressed as a percentage, which an investor demands on an investment to take up the risk associated with the stock. It has a negative co-relation to the price of the stock. If the required rate of return for an investor increases then he would not be willing to pay the same price for the stock with the given dividend that he paid earlier. He would want the price to come down with other things held constant. Therefore, if the required rate of return for an investor of AirJet Best Parts Inc. increases then the price of the stock would have to decrease. Dividends are the future cash flows of the stock and there discounted values are accumulated to get the maximum price an investor should pay for the stock. If the dividend increases than the price of the stock will subsequently increase as well. Vice versa, if the dividends decrease then the price of the stock will also reduce. Task 3: Bond Evaluation 1. If the coupon rate is changed to 7.06% semiannual then the bond will sell at par. 2. Coupon rate is the rate at which your interest value is calculated which an investor will receive on the bond. This will differ from yield to maturity because YTM is the return; an investor gets to purchase a bond at the current prevailing price which usually differs from the price it was issued at. 3. Bond prices involve returns for various risks which include interest rate ...Show more
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Summary

Task 1: Assessing loan options for AirJet Best Parts, Inc. 1. Prime rate is 3.25% Bank APR No. of times compounded National First 3.25%+6.75%=10% Semiannually Regions Best 13.17% Monthly For National Bank the effective annual rate would be: For Regions Best, the effective annual rate would be: 2…
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