- 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:
a. Bond A which is …show more content…
Yield to maturity on the B bonds is 8.38% at price of $850 in contrast to the 8.8% industry average yield. Thus yield to call on the B bonds is 12.53% that comes from the formula: At PV = $850 At PV = $813.88
Yield to maturity
Yield to call 8.38%
13.61% It is explained that the lower the fair price that the investor pays, the greater the capital gain he gets. In case of the offered price of $850 that Tony's customer is willing to pay; Swan-David Corporation will get the benefits from the expense of the investor. Moreover, the B bonds are not attractive enough in comparison to others like the A bonds, the investor should face the problem in reselling the B bonds in the secondary market if he does not hold the bond to the maturity or SDI does not call the bond either. Hence, the investor should consider carefully in buying the B bonds.
The difference between interest rate risk and reinvestment rate risk: Interest rate risk Reinvestment rate risk
Relate to Value of the bonds Income produced
Long-term bonds increase stable
Short-term bonds stable increase No fixed-rate bond can be considered absolutely riskless. Depend on investor objective in how long they hold the bonds, optimal decision should be made to meet their need. Recently, bond portfolio managers attempt to balance these two risks, but some risks generally remain. Bond B investors are concerned about interest