ourse 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 Plain, Inc. The Course Project is provided in two parts as follows:

Part I – In Part I, you work with Aero Plain, 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.

PART I Here is how you will be graded: Possible Earned

Task 1: Assessing loan options

Convert APR to EAR:

Screen Shot 3

Calculations 7

Decision 5

Calculate payments 10

Calculate total of payments 10

Decision 5

Calculate LoansRUS monthly payments 10

Calculate LoansRUS total payments 5

Decision 5

Task 2: Bond Evaluation

At what coupon rate will the market price equal the par value? 10

What is the difference between the coupon rate and the YTM 10

What factors will contribute to the riskiness of bonds 10

Positive and negative covenants and their effect on bond price? 10

Task 3: Evaluating Competitor’s Stock

Determine the required return for a key competitor:

Screen Shot 3

Calculations 7

Calculate the share price given a constant growth rate 10

Does preferred or common stock have a higher price? 10

How do changes in dividends or required return affect price? 10

TOTAL Sum(D4:D19) 140

About Aero Plain, Inc

Aero Plain, Inc. is a simple (“plain”) 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 Plain, Inc

The company needs to finance $8,750,000 for a new factory in Mexico. The funds will be obtained through a commercial loan. Here is some of the information regarding the APRs offered by two well-known commercial banks.

Bank APR Frequency of Payments

National First Prime Rate + 4.75% Monthly

Regions Best 8.00% Quarterly

1. Assuming that Aero Plain is considering loans from National First and Regions Best, what are the EARs for these two banks? Hint: to find the Prime Rate for National Bank, go to the St. Louis Federal Reserve Board’s website (http://research.stlouisfed.org/fred2/). From there, just type “MPRIME” into the FRED search bar. Include a screen shot of the MPRIME page and show your calculations. (10 pts)

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

3. What would be the payments (quarterly or monthly whichever is appropriate) on a 5 year loan of $8,750,000 from each bank? (10 pts)

4. What is the total amount to be paid under each loan? (5 pts)

5. Does this new information chance your recommendation? (5 pts)

6. Another bank, Loans-R-Us, has submitted a proposal to loan Aero Plain to provide the needed $8,750,000 at 7.5% APR with monthly payments 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)

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Task 2: Bond Evaluation

Aero Plain, Inc. is also considering the issue of new, 15-year bonds to obtain the needed funds for the new plant in Mexico. The company currently has 5.5% semiannual coupon bonds in the market selling for $1,056 that mature in 15 years.

1. What coupon rate should Aero Plain set on its new bonds so that the selling price is equal to the par value? Show your calculations and explain. (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? Please explain. (10 pts)

4. What type of positive and negative covenants might Aero Plain use in future bond issues? (10 pts)

Task 3: Evaluating Competitor’s Stock

Aero Plain, Inc. is concerned about recent declines in the stock market and would like to compare its stock price and rate of return with those of its 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 5.5%, what is the rate of return for one of three key competitors? Use Yahoo Finance or Google Finance to obtain the latest dividend amount and price for one of the key competitors. (Caution: The dividend shown in Google Finance is the Quarterly dividend so be sure to make the adjustment to annual.) Include a screen shot of the data page for the firm you selected and show your calculations. (15 pts)

2. Aero Plain wants to offer the same rate of return you calculated above to its stockholders. But Aero Plain only pays dividends of $1.25 annually and the anticipated growth rate is a little slower at 4.4%. Using the rate of return above, what should be the current selling price of Aero Plain, Inc. common stock? Show your calculations. (10 pts)

3. Assume Aero Plain has also a preferred stock issue. Which type of stock, common or preferred, has more risk? Which one has the higher rate of return? (5 pts)

4. What would happen to the price of common stock you computed above if Aero Plain, Inc. announced that dividends at the end of the year will increase? What if the required rate of return increases? (10 pts)