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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…show more content…
- Moreover, capital budgeting correlates to security valuation as well when the inflation occurs. For that circumstance, the firm should identify the projects that implement to the firm's value by preparing the portfolio diversifying their products in purpose of appealing to investors. This kind of task requires the firm, especially the marketing research group, to specify the size of market and potential customers to reach their needs. Question 4: As the case concerned, the B bond is not actively traded and no valid market quotation is available. The reasonable interest rate to use in valuing the B bonds is calculated as follow: Using the following give data: Initiative data Calculation result is compounded semiannually Par value (FV) = $1,000 Coupon rate = 6.90% Payment annually = $69 Year to maturity = 25 Year to call = 23 Payment semiannually = $34.5 N = 46 Formula: Present value of Bond B's cash flow is $813.88 From the perspective of the most recent S&P Bond Guide, due to the financial problem in 1994, three-level downgrading was applied to the B Bond yield rate that results in the rating position change in industry average yield into BB by 8.8%. Therefore, the different BB yield and the industry average rate indicated that the investor required a higher return on B bond since it is more risky than that in the previous year. There is a restriction in decision making of buying the B bonds in this

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