User Account

All Pages

Difference between the coupon rate and the ytm of bonds

Assignment Help Corporate Finance
Reference no: EM13194870

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 + 6.75%

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? Hint for National Bank: Go to the St. Louis Federal Reserve Board's website (https://research.stlouisfed.org/fred2/). Select "Interest Rates: and then "Prime Bank Loan Rate:. Use the latest MPRIME. Show your calculations. (15 pts)

2.Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)

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. (20 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. 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. (15 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 1% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50? Show your calculations. (10 pts)

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. (5 pts)

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? (10 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 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.

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

Reference no: EM13194870

Questions Cloud

Compute dan and cheryl''s income tax liability for 2011 : Compute dan and Cheryl's income tax liability for 2011. Disregard the alternative minimun tax - During 2011, Dan drove his car a total of 38,000 miles ( evenly throughout the year ),of which 32,000 were business related.
Find out the mass percent of sodium chloride : This aqueous mixture then reacts with excess aqueous lead (II) nitrate to form 21.75g of solid. Determine the mass percent of sodium chloride in the original mixture?
Summarize the main points of each document : Summarize the main points of each document. Explain how each relates to the time period.
Compute the ph after addition of the titrant : Consider the titration of 50.0 mL of 0.20 M NH 3 (K b =1.8×10 ?5 ) with 0.20 M HNO 3 . Calculate the pH after addition of 50.0 mL of the titrant.
Difference between the 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 factors will contribute to the riskiness of these bonds? Explain in detail your ra..
Engineering-manufacturing and supply management personnel : Discuss the individual contributions that could be made by a cross-functional team to the following list of activities. Assume the team consists of engineering, manufacturing, and supply management personnel.
Importance of academic honesty : Please write a 3 page word document on the "Importance of Academic Honesty" Please, please use 3 peer reviewed resources
Find the final temperature of the cu : the final temperature of the cu? I tried to use Q=MS(delta)T and solve for the tinal temp instead of the change in temp but kept getting 45°c.
Calculate the breakeven point in units : How many units will you have to sell to break even in the business? Calculate the breakeven point in units, and then in dollars.

Reviews

Write a Review

Corporate Finance Questions & Answers

  Calculate the average and expected selling price

Calculate size of the M1 money supply using the following data. Currency plus traveler's checks 25 million dollar, Negotiable CDs 10 million dollar and Demand deposits of 13 million dollar.

  Explain vpn works

Explain ciphertext and describe how you would test a piece of ciphertext to estimate quickly if it was likely the result of transposition?

  Identifying missing figures and preparation of balance sheet

Identifying missing figures and preparation of Balance Sheet and Complete the balance sheet below, based on the given data

  Basic financial and economic data on the country

As a financial manager be interested in doing business in this country-Growth Rate of GDP, both current and historical

  Find the question based on common stock

Theory question based on common stock, dividend yield and capital gain and Would the distribuition between the dividened yield and the capital gain yield be influenced by the firm's decision to pay more dividiends rather than to retain and reinvest..

  Find the amount for common stockholders

Written, Corporation has 300,000 outstanding shares of $2 par common stock and 60,000 shares of no-par 8 percent preferred stock with a stated value of dollar 5.

  Compute the amount to be reported as income taxes payable

In 2012, Amirante Corporation had pretax financial income of $168,000 and taxable income of $120,000. The difference is due to the use of different depreciation methods for tax and accounting purposes. The effective tax rate is 40%. Compute the am..

  Calculate average working capital requirement

GX Ltd is about to commence a new business for which you are asked to calculate its average Working Capital Requirement for the first year with the help of the following information:

  Explain using capital budgeting and capital structure

Suppose you work for local hospital you and your colleagues require deciding on whether to purchase new machine for the clinic.

  Sophisticated valuation procedures

A standard criticism of investment banking company is their method to valuation which includes estimating a value for an offering and then manipulating input variables into conventional valuation techniques to justify the arrived value.

  What is the percentage price change of these bonds

Bond J is a 4 percent coupon bond. Bond S is a 11 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 7 percent. If interest rates suddenly rise by 4 percent, what is the percentage price chang..

  Journal entries related to bonds

Journal entries related to bonds - What consolidation journal entry would have been recorded in connection?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd