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Swan- Davis, Inc. Case

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Swan-Davis, Inc.

Executive Summary

We were assigned the task of analyzing Swan Davis’ capital value based on their current market performance. Currently, Swan Davis’ capital is comprised of bonds and equity. They have two types of bonds. Bond A is a highly liquid bond last priced at $1092 but has a fair market value of $813 due to the fact that the ratings of Swan Davis’ bonds decreased from A to BB. Bond B is an illiquid bond that was last priced at $850 but again due to the ratings of their bonds and that it is illiquid the fair value is actually $404. Swan Davis has preferred stock and common equity. Their preferred stock currently traded for $97 with dividend of $8.25. The after-tax return to investors for preferred stock was 1.53% for corporations and 5.13% for individuals. The cost of equity for common stock was 16.17% and 16.08% respectively. Valuation of capital is based on a number of factors such has ROE, debt management ratios and projected earnings growth just to name a few. These have to be calculated using current markets rates to determine if SDI’s performance aligns with the price that the market has valued it at. The methods used to calculate these figures may vary internally and externally given the information used in calculating them. Swan Davis’ performance has fluctuated given the level of competition and unstable profits. Although that may be they have managed keep their investors afloat with steady returns on equity. Their B bonds should be watched more closely since it is priced more than it should be but overall SDI’s capital structure is performing adequately. Introduction

As part of a consulting firm you are hired to explain how the market decides the value of its securities in order to make accurate estimates of capital costs for use in capital budgeting. You will be presenting an analysis to Bob Wilkes, the chief

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