Difference between coupon rate and the ytm of bonds

Reference no: EM13205617

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 3% + 6.75%= 9.75%	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?

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

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.

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.

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.

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.

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?

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?

2. What is the difference between the coupon rate and the YTM of bonds?

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

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

Reference no: EM13205617

Questions Cloud

Find the probability that among 6 randomly selected graduate : Find the probability that among 6 randomly selected graduates, at least one finds a job in his or her chosen field within a year of graduating.

Depict a complete mechanistic sequence for the reaction : Outline a complete mechanistic sequence for the reaction of 2-bromobutane with potasium2-methyl-2-propoxide in 2-methyl-2-propanol solvent to form thethree alkenes generated in the reaction

How to shift the demand for health care leftward : The price elasticity of demand for health care is such that an increase in the price of health care will: decrease total health care expenditures. increase total health care expenditures. shift the demand for health care rightward. shift the deman..

Use differentials to estimate the maximum error : The radius of a circular disk is given as 19 cm with a maximum error in measurement of 0.2 cm.

Difference between coupon rate and the ytm of bonds : What coupon rate should AirJet Best Parts set on its new bonds to sell them at par value and what is the difference between the coupon rate and the YTM of bonds?

What are the lengths of the two pieces of wire : A wire 210 inches long is cut into two pieces. One piece formed into a square, and the other into a circle. If they have the same area, what are the lengths of the two pieces of wire.

What is the basic economic argument for greater income : The basic economic argument for greater income equality is that: an equal distribution of income is the logical outcome of any tax-transfer program. because citizens enjoy political equality, they are also entitled to economic equality.

How would you apply the concept of marginal probability : How would you apply the concept of marginal probability to the significance of selling 5,000 units if the marginal probability of doing so is 85%?

Explain solution containing thallium : A 25ml sample of solution containing thallium(I) (TI) was treated with K2CrO4 to perticipate thallium chromate. The solid TI2CrO4 was filtered, washed to remove excess chromate, and then dissolved in dilute H2SO4

User Account

All Pages