Financial Assessment of AirJet Best Parts - Coursework Example

The common stock will have a higher price than the preferred stock because a preferred stock pays a fixed dividend and tend to fluctuate in price far less than common shares. This means that preferred stock is comparatively less risky than common shares therefore; the return offered on it will automatically be lower as compared to common shares. Common stock, on the other hand, is entitled to a high variance in price which means that it carries a higher risk than preferred shares. Therefore, a common stockholder will demand a higher return to accept the given risk in the stock. Another reason for the higher price of common stock is the dividend growth. We know that the price of a share is the sum of all future cash flows associated with the stock. Therefore, if the company has high dividend growth then ultimately the cash flows of that stock will augment with each year and the sum of cash flows would inevitably increase. This would eventually lead to higher prices as compared to fixed dividends yielding preferred stock.

The price of a share is the sum of all future cash flows discounted to present value. Therefore, if there is any anticipated increase in the future cash flow then a subsequent effect in the price of the stock is expected. Therefore, if AirJet Best Parts, Inc. announces that dividends at the end of the year will increase then the price of the stock will also increase.

The required rate of return is the return, expressed as a percentage, which an investor demands on investment to take up the risk associated with the stock. It has a negative correlation to the price of the stock. If the required rate of return for an investor increases then he would not be willing to pay the same price for the stock with the given dividend that he paid earlier. He would want the price to come down with other things held constant. Therefore, if the required rate of return for an investor of AirJet Best Parts Inc. increases then the price of the stock would have to decrease.

Dividends are the future cash flows of the stock and their discounted values are accumulated to get the maximum price an investor should pay for the stock. If the dividend increases then the price of the stock will subsequently increase as well. Vice versa, if the dividends decrease then the price of the stock will also reduce.

The coupon rate is the rate at which your interest value is calculated which an investor will receive on the bond. This will differ from yield to maturity because YTM is the return; an investor gets to purchase a bond at the current prevailing price which usually differs from the price it was issued at.

Bond prices involve returns for various risks which include interest rate risk, maturity risk, market risk, and many more. Also, two things affect the present value of a bond which are interest rate and time to maturity. If the interest rate increases then the price of the bond will fall to match the increased required rate of return. Moreover, if the date to maturity increases then the maturity risk is subsequently increased, this, in turn, will decrease the price of the bond to match the increased required return.

AirJet Best Parts Inc. should use a clause in the bond issued that gives them an option to call the bond when the interest rate falls. The bonds will be called if interest rates drop below the coupon rate. This will allow the company to call in previous debt at a lower rate and then reissue debt at a lower interest rate if needed.