edf40wrjww2CF_PaperMaster:Desc
INTRODUCTION
- The Swan Davis Corporation case focuses on following issues:
? The importance in bond and stock valuation;
? The capital structure of the company; and
? How they effects to the capital budgeting decisions of the company.
- Swan- Davis Inc., (SDI) manufactures equipment for sale to large contractors, the company was found in 1976 and it went to the public in 1980 at its shares value risen from $1 to $15 since it enter to the market.
- The financial statements for the past three years show a decline trend in both the operation and return on shareholder of the company, so a closer look at the factors contributing to this decline is needed.
- The capital structure of company mainly constitutes of:
1. Deb
a. Bond A which is activities trade and highly liquid, issued 10 years ago, and it has 10 years to maturity.
b. Bond B which is thinly traded and no valid market quotation is available; it has 23 years to maturity more.
2. Preferred stock
3. Equity ? Stock and retained earning.
Question 1:
If an investor bought some of SDI's A bonds at the current market price, what would be his/her yield to maturity?
Look at the case concerns, bond A has a $1000 par value and coupon rate is 10%, pail semiannually. The bond was issued 10 years ago, and has 10 years to maturity; current market price is $1092.
Input data Calculation result is compounded semiannually
Par value (FV) = $1,000
Coupon rate = 10%
Payment annually = $100
Present value= $1092
Year to call=10&nb ...