Swan Davis Inc

Case 72 Swan-Davis, Inc. Bond and Stock Valuation Swan-Davis, Inc. (SDI) manufactures equipment for sale to large contractors. The company was founded in 1976 by Tom Stone, the current chairman, and it went public in 1980 at $1 per share. The stock currently sells for $15, Stone owns 14 percent of the shares, and other officers and directors control another 13 percent. The industry is cyclical, and competition is strong, so profits are some-what unstable. Tables 1, 2, and 3 provide historical balance sheets, income statements, and ratios for the company for the period 1994–1996, Table 4 provides industry average data for 1994-1996, and Table 5 provides one security analyst’s forecasted data for the company based on assumptions set forth later in the case. Your consulting firm was just hired to explain to SDI’s managers how the market establishes the values of its securities—management wants this information in order to make accurate estimates of capital costs for use in capital budgeting. Your boss, Maria Gonzales, asked you to head up the project, and she set up a meeting for you with Bob Wilkes, SDI’s chief financial officer (CFO), and Tony Biddle, a security analyst who follows SDI. Tony Biddle agreed to help with the project, but due to other commitments, his help will be limited to providing data. To avoid any poten- tial problem with illegal disclosure, it was agreed that no confidential company data should be used-the analysis should be based entirely on publicly available data plus the data in Table 5 which Tony developed on his own.After some discussion, it was agreed that you should use the following securities to explain the valuation process: a. SDI currently has two bond issues outstanding. Bond A has a $1,000 par value and a coupon rate of 10 percent, paid semi-annually. This bond was issued 10 years ago, it has 10 years remaining to maturity, and it has 2 years of call protection left, after which it can be