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 $8,500,000 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 10.25% Quarterly
Regions Best 13.17% Bi-Monthly
1. Assuming that AirJet Parts, Inc. is considering loans from National First and Regions Best, what are the EARs for these two banks? Show your calculations. (11 pts)

2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (5 pts)

3. AirJet Best Parts, Inc. has decided to take a $7,980,000 loan being offered by Regions Best at 9.5% APR (compounded bi-monthly) for 5 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale. (11 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. At the last time the information was available, the stock price for the main competitor was $75 and the last dividend paid was $2/share.
1. Using the dividend growth model and assuming a dividend growth rate of 3%, what is the rate of return for this competitor? Show your calculations. (7 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 2% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50? Show your calculations. (7 pts)

3. Now suppose that AirJet Best Parts, Inc. envisions moving to a Zero Growth (Dividend) Model for its stock and that the stock is expected to pay a $1 dividend every quarter with a required return of 10% quarterly compounded. What should the price of the share be? Show your calculations. (8 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 10% annual coupon bonds in the market that sell for $1075 and mature in 20 years. Consider that the Par Value (or Face Value) is $1000.
1. What coupon rate should AirJet Best Parts set on its new bonds to sell them at par value? Show the formula and your calculations(15 pts)

2. What is happening to the bond price when the coupon rate increases? When the YTM decreases? When the period to maturity increases? (6 pts)

3. What particular element in the calculation of the bond price explains why the bond price for Greece at the top of recent financial crisis for this country, was very low? Explain your answer (6 pts)

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)