Task 1: Assessing loan options for AirJet Best Parts, Inc. The company needs to

Question

Task 1: Assessing loan options for AirJet Best Parts, Inc.
The company needs to finance $9,000,000 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 + 7.75% Semiannually
Regions Best 13.42 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 (http://research.stlouisfed.org/fred2/). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations.

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 $8,100,000 loan being offered by Regions Best at 9.2% APR for 5 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale.

Explanation / Answer

EAR = (1+APR/m)^m - 1 where m = no of periods or times compounded 1. National First + 7.75% Semiannually. So m=2 So EAR = (1+7.75%/2)^2 - 1 = 7.90% 2. Regions Best 13.42 Monthly. So m =12 So Ear = (1+13.42%/12)^12 - 1 = 14.28% 2 (a) From http://research.stlouisfed.org/fred2/, we tae APR = 3.5% monthly compounding. So EAR = (1+3.5%/12)^12 -1 = 3.56% Based on above EARs, I will recommend National First+ as it has the lowest effective rate of interest on Loan. 3. Loan amount $8,100,000, APR = 9.2%, 5 years. It is monthly compounding SO m=12 SO EAR = (1+9.2%/12)^12 -1 = 9.60% pa So Monthly Payment PMT = PMT(Rate,nper,PV) = PMT(9.6%/12,5*12,-8100000) So Monthly Payment = $170,511

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