Bonds
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
Payment semiannually = $50
N = 10
Formula: PV=
Yield to maturity (YTM) is: 8.6%
Question 2:
From the data of the case we can calculate the current yield to call of bond A, which is equal annually coupon payment divided by the bond's current price is 9.16%
After 1994, because of financial problems the company' bond were downgraded and rated BB by S&P, a return reasonable rate for bond A is 8.8% is implied in the Bond Guide.
If the YTM is 8.8%, the Present value of bond
- 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
Payment semiannually = $50
N = 10
Formula: PV=
Yield to maturity (YTM) is: 8.6%
Question 2:
From the data of the case we can calculate the current yield to call of bond A, which is equal annually coupon payment divided by the bond's current price is 9.16%
After 1994, because of financial problems the company' bond were downgraded and rated BB by S&P, a return reasonable rate for bond A is 8.8% is implied in the Bond Guide.
If the YTM is 8.8%, the Present value of bond