Course Project Course Project - Part I Introduction The Course Project is an opp
ID: 2706855 • Letter: C
Question
Course Project
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 Aero-Botics, Inc. The Course Project is provided in two parts as follows: Part I - In Part I, you work with Aero-Botics, 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 Aero-Botics, Inc. Aero-Botics, 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 Aero-Botics, Inc. The company needs to finance $7,000,000 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. Assuming that Aero-Botics, Inc. is considering loans from Nation's 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 Categories; Money, Banking & Finance; Interest Rates; and then "Prime Bank Loan Rate". Use the latest MPRIME. Show your calculations. What would be the payments (quarterly or monthly whichever is appropriate) on a five year loan of $7,000,000 from each bank? What is the total amount to be paid under each loan? Aero-Botics, Inc. has decided to take an $7,000,000 loan being offered by Loans R US at 8.5% APR for 6 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale. Task 2: Evaluating Competitor's Stock Aero-Botics, 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. Use Yahoo Finance, Google Finance or some other market watch service to obtain the latest dividend (make sure you get the ANNUAL dividend) amount and stock price for one of the key competitors mentioned above. Then, using the dividend growth model and assuming a dividend growth rate of 3%, what is the required rate of return for the company you selected? Include a screen shot of the market watch page from which you gathered the data. Using the rate of return from part 1 above, what should be the current share price of Aero-Botics, Inc. if the company maintains a constant 4% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50? Show your calculations. Assume Aero-Botics 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. What would happen with the price you computed in number 2 above if Aero-Botics, Inc. announces that dividends next year will increase? What if the required rate of return increases? How will a change in the dividend or in the required rate of return affect the stock price? Task 3: Bond Evaluation Aero-Botics, Inc. would like to issue 20-year bonds to finance the new plant in Mexico. The company currently has 5.5% semiannual coupon bonds in the market that sell for $1,062 and mature in 20 years. Assuming the same required rate of return, what coupon rate should Aero-Botics set on its new bonds to sell them at par value? What is the difference between the coupon rate and the YTM of bonds? What factors will contribute to the riskiness of these bonds? Explain in detail your rationale. What type of positive and negative covenants may Aero-Botics, Inc. use in future bond issues?Explanation / Answer
Total payment for 5 years with National bank having bank EAR= 10.25 % is given by
10.25
= 7,500,000 x --------- = 768,750 Now divide it by 5 for years = 153,750
100
Regions Best = 7,500,00 * 14/100= 1,050,000 Now divide by 60 = 17,500
1. What is the total amount to be paid under each loan? (5 pts)
National Bank is 7,500,000 + 10.25 = 8,268,750
Regions Bank is 7,500,000 + 14 = 8,550,000
2. Does this new information chance your recommendation? (5 pts)
I would still go with the National bank because the interest is lower and it will cost you less in the long run.
3. Another bank, Loans-R-Us, has submitted a proposal to loan Aero Plain to provide the needed $7,500,000 at 8.5,% APR for 6 years. What are the monthly payments and the total of the payments on this loan? Does this new information change your previous decision? Show your calculations and explain your rationale. (20 pts)
7,500,000x8.5/100=637,500 So monthly payments would 637,500/72=8,854.17
An the total paid would be 7,500,000+8.5 =8,137,500
National Bank is 7,500,000 + 10.25 = 8,268,750
Regions Bank is 7,500,000 + 14 = 8,550,000
So In the end I would go with Loans-R-Us because even know you are paying another year. I still pay out less.