Assessing Loan Options -Sample Paper

Assessing Loan Options

 

Aero Faust will be charged a prime rate of 3.25% every month by the National first Bank, with an additional charge of 4.25% charged every quarter of the year. By the end of the first year, the EAR (Equivalent Annual rate) for National first will be {(3.25%* 800,000)*12} + (4.25%*800,000)* 4 = 312,000 + 136000

Total EAR = 448,000

The EAR for Regions Best would be:

{7.5% * 800,000) *12} = 720,000

Based on the calculations, it would be appropriate for Aero Faust Company to get the loan from National Fist Bank because the amount of return offered to them at the end of every year is low compared to what is remitted back to Regions Best. National First would require that Aero remit a total pay of 448,000 dollars at the end of each year while Regions best would demand a return of $ 720. 000.

When making the calculations, it is appropriate to start with the EAR because it gives the total money that the lenders will be giving out as loans to the borrowers. Moreover, they go ahead to explain the terms of borrowing the cash and the period of payback that will be expected from the borrower. Furthermore, APR gives an upfront figure that the lender will charge the borrower.

EAR may also be used but it comes second because it primarily deals with the issues of bank overdrafts that are borrowed in advance. They however do mention the above situations.

If the rates given by the two banks still remain in place, then for a seven year loan, the payments made will as follows:

For National First:

If the prime rates were not available, then the value paid would be much less as compared to what is paid after the inclusion of the prime rates. Additionally, it would be appropriate if the rates were charged on an annual basis rather than being charged on either monthly or quarterly basis. If the charges are conducted on a yearly basis, then the remittances will be as follows:

(4.25%*800,000) = (136000) *7 = $ 238,000

For regions Best Bank:

{7.5% * 800,000)} = (720,000) *7 = $ 420,000

Under each of the above loan specifications, the total amount payable for each loan would be calculated as follows:

For National First:

{(3.25%* 800,000)*12} + (4.25%*800,000)* 4 = (312,000 + 136000) *7 = $ 3,136,000

For Regions best, the total amount would be:

{7.5% * 800,000) *12} = (720,000) *7 = $5,040,000

Even with the elimination of the prime rates and the changes in mode of payments from monthly to yearly payments, recommendations still remain the same.

 

 

For the Loan- a ranger option, the total amount of APR interest rate payable every year would be (7% * 8,000,000) = $ 560,000. The yearly payment can then be divided by twelve in order to obtain the monthly payments a follows $ (560,000/ 12) = $ 46,666.67.

The total payments for the loan will be 560, 000 * 8 = $ 4,480,000 (interest). If the original amount borrowed is added then the figure would total to (4,480,000 + 8,000,000) = $ 12,480,000.

This information does not have an impact on the initial recommendations because the figures given are still higher than the initial figure recommended.

Task 2

Yield to maturity = (6.5% * 1075) * 2) * 15} = $ 2096.

Coupon rate refers to the interest rate charged on a bond, and it is normally stated at the time of issue. Yield to maturity is a reflection of the figure that the investor will be paid in a future period.

Risks that could lead to the riskiness of bonds include: reinvestment risk, call risk, interest rate risks, default risk and inflation risks. The growth rate for Boeing can be retrieved from http://www.stock-analysis-on.net/NYSE/Company/Boeing-Co/DCF/DDM.

Using the dividend growth model shown below, the rate of return for Boeing can be calculated

P=D/k-g
Where: P=security\’s price; D=dividend payout ratio; k=required rate of return (derived from the capital asset pricing model; g=dividends\’ expected growth rate.

K = (D + Pg)/P

K = (38.0 + (131.70*14.58)}/ 131.70 = 14.87

Rate of return = 14.87

Once the amount of common stocks increases then definitely the prices will go down. On the contrary, if the required rate of return were to increase, then the prices of the common stocks would also go up.


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