Task 1:  Assessing loan options for Aero Faust, Inc

The company needs to finance $8,000,000 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.

1. Aero Faust 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. (9 pts)

2. Based on your calculations above, which of the two banks would you recommend and why? Please explain. (3 pts)

3. When calculating the payments, should we use the EAR or start over with the APR?  Why? (5 pts)

4. What would be the appropriate payments, for each bank on a 7 year loan of $8,000,000? Show your calculations (10 pts)

5. What is the total amount to be paid under each loan? Show your calculations (10 pts)

6. Does this new information chance your recommendation? (5 pts)
7. An online bank, Loan-a-Ranger.com, has submitted a proposal to loan Aero Faust to provide the needed $8,000,000 at 7.0% APR with monthly payments for 8 years.
8. What are the monthly payments (10 pts)
9. What are the total of the payments on this loan? (5 pts)
10. Does this new information change your previous decision? (5 pts)

Show your calculations and explain your rationale.

Task 2: Bond Evaluation

Aero Faust, Inc. is also considering the issue of new, 7 percent, semiannual, 15-year bonds to obtain the needed funds for the new plant in Mexico. The company currently has 6.5% semiannual coupon bonds in the market selling for $1,075 that mature in 15 years.

1. What will be the yield to maturity and the selling price of the new bonds?   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 Faust use in future bond issues? (10 pts)

Task 3: Evaluating Competitor’s Stock

Aero Faust, 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.  (13 pts)
2. Aero Faust wants to offer the same rate of return you calculated above to its stockholders.  But Aero Faust only pays dividends of $1.50 annually and the anticipated growth rate is a little slower at 4%.  Using the rate of return above, what should be the current selling price of Aero Faust, Inc. common stock?  Show your calculations. (10 pts)
3. Assume Aero Faust 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 Faust, Inc. announced that dividends at the end of the year will increase? What if the required rate of return increases? (10 pts)