Swan-Davis Inc.(1) Final(1)(1)

SDI: Case Study By: JNMorton

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TABLE I: Historical Balance SheetSwan-Davis Incorporated

Historical Comparative Balance SheetFor years ended 1994-1996

1994 1995 1996AssetsCash & Securities $89.4 $87.6 $22.5 3.93%Accounts receivable $72.8 $82.6 $112.4 19.65%Inventories $80.1 $88.2 $100.6 17.59%Other current assets $1.0 $1.0 $1.0 0.17% Total current assets $243.3 $259.4 $236.5 41.35%

Gross plant and equipment $242.2 $343.2 $460.8 80.56%Accumulated depreciation $78.7 $104.4 $131.2 22.94% Net plant and equip $163.5 $238.8 $329.6 57.62%Other assets $1.0 $1.0 $1.0 0.17%

Total assets $407.8 $499.2 $567.1 99.14%

Liabilities and EquityAccounts payable $58.8 $68.5 $78.3 13.70%Notes payable $9.0 $38.5 $44.7 7.81%Accruals $17.4 $34.8 $23.7 4.13%Other current liabs. $1.0 $1.0 $1.0 0.17% Total current liab $86.2 $142.8 $147.6 25.81%

LT debt $120.6 $135.5 $137.1 23.98%Min int. & other liab. $1.0 $1.0 $1.0 0.17%Def tax & other cred. $1.0 $1.0 $1.0 0.17% Total liabilities $208.8 $280.2 $286.8 50.14%

Preferred stock 34.4 34.4 86.3 15.09%

Common stock $ 11.9 $ 11.7 $ 13.6 2.38%Retained earnings $ 152.6 $ 172.8 $ 180.4 31.53% Total common equity $ 164.5 $ 184.5 $ 194.0 33.91%

Total liabs & equity $407.8 $499.2 $567.1 99.14%

SDI: Case StudyBy: JNMorton

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TABLE II: Income StatementSwan-Davis Incorporated

Historical Comparative Income StatementsFor years ending 1994-1996

Common Size 19961994 1995 1996 84.8%

Sales $650.00 $589.00 $572.00 4.7%Costs and expenses: 1.5% COGS Excl. Depr. $540.80 $490.05 $485.00 0.5% Depreciation $22.90 $25.70 $26.80 91.5% Selling/admin $9.75 $8.84 $8.58 Other $3.25 $2.95 $2.86 8.5% Total costs $576.70 $527.53 $523.24 2.5%

Net oper. inc. (EBIT) $73.30 $61.47 $48.76 6.0%Interest $10.26 $13.84 $14.51 2.4%

0.0%EBT $63.04 $47.63 $34.25 3.6%Taxes 40% $25.22 $19.05 $13.70 1.0%

0.0%NI before pref div $37.82 $28.58 $20.55 2.6%Dividends to pref $2.75 $2.75 $5.90 0.0%

1.2%

NI avail to common $35.07 $25.83 $14.65 1.3%

Dividends to common $4.77 $5.64 $7.09

Additions to ret earn $30.30 $20.19 $7.56

Stock price, year-end $35.00 $22.00 $15.00Millions of shares $11.92 $11.74 $13.64Earnings per share $2.94 $2.20 $1.07Dividends per share $0.40 $0.48 $0.52Price/Earnings $11.90 $10.00 $13.96Dividend Yield 1.14% 2.18% 3.47%


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TABLE III: Financial RatiosIndustry

1994 1995 1996 AverageLiquidity: Current 2.8 1.8 1.6 2.6 Quick 1.9 1.2 0.9 1.4 CA/CL req. by cov. 1.8 1.8 1.8Asset Management: Inv t'novr (S/I) 8.1 6.7 5.7 9.3 Days sales out 40.3 50.5 70.7 36.2 Fixed asset turn 4.0 2.5 1.7 2.1 Total asset turn 1.6 1.2 1.0 1.4

Debt Management: Debt + Pref. ratio 59.6% 63.0% 65.8% 42.4% Equity multiplier 2.5 2.7 2.9 1.7 Times int earned 7.1 4.4 3.4 6.1

Profitability: Profit margin 5.4% 4.4% 2.6% 6.4% Basic earning power 18.0% 12.3% 8.6% 20.3% Return on assets 8.6% 5.2% 2.6% 9.0% Return on equity 21.3% 14.0% 7.6% 15.6%

Market Value: Price/Earnings 11.9 10.0 14.0 15.0 Market/Book 2.5 1.4 1.1 2.6

Du Pont Analysis: Profit margin 5.4% 4.4% 2.6% 6.4% Total asset turn 1.6 1.2 1.0 1.4 Equity multiplier 2.5 2.7 2.9 1.7

21.3% 14.0% 7.6% ----- Return on equity 0.2

----- Check ROE 0.2Payout ratio 13.6% 21.8% 48.4% 0.4 g(EPS) 0.1

Altman's Z-score equation: 4.47 2.98 2.53


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TABLE VI: Financial Ratios1994 1995 1996

Liquidity: Current 2.6 2.8 2.6 Quick 1.7 1.5 1.4

Asset Management: Inv t'novr (S/I) 8.2 8.9 9.3 Inv as a % of sales 12.20% 11.24% 10.75% Days sales out 35.8 32.1 36.2 Receivables as % of sales 9.94% 8.92% 10.06% Fixed asset turn 2.3 2.5 2.1 NFA as % of sales 43.48% 40.00% 47.62% Total asset turn 1.7 1.5 1.4 Cash as % of sales 1.0% 1.0% 1.0% Other assets as % of sales 1.0% 1.0% 1.0% Other current assets as % of sales 1.0% 1.0% 1.0%

Debt Management: Debt + Pref. ratio 39.2% 41.2% 42.4% Equity multiplier 1.60 1.70 1.70 Times int earned 7.90 6.50 6.10 A/P as % of sales 3.00% 3.00% 3.00% Accruals as % of sales 2.71% 2.71% 2.71% Other current liabilities as % of sales 0.1% 0.1% 0.1% Minority interest as % of sales 0.1% 0.1% 0.1% Deferred taxes as % of sales 0.1% 0.1% 0.1%

Profitability: Profit margin 5.10% 4.90% 6.40% Basic earning power 15.90 14.60 20.30 Return on assets 9.10 8.70 9.00 Return on equity 14.20 12.60 15.60 COGS as % of sales 78.00% 78.00% 78.00% Depreciation as % of sales 5.69% 5.69% 5.69% Selling/administrative expenses as % of sales 1.50% 1.50% 1.50% Other costs as % of sales 0.29% 0.29% 0.29%

Market Value: Price/Earnings 12.90 13.80 15.00 Market/Book 2.10 2.60 2.60Du Pont Analysis: Profit margin 5.10% 4.90% 6.40% Total asset turn 1.7 1.5 1.4 Equity multiplier 1.6 1.7 1.7


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Return on equity 14.20% 12.60% 15.60%Payout ratio 35.0 35.0 35.0

SDI: A Case StudyBy: JNMorton

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TABLE V: Historical Balance SheetSwan-Davis Incorporated

Historical Comparative Balance SheetFor years ended 1994-1996

1997 1998 1999 Common Size 1997AssetsCash & Securities $6 $7 $8 1%Accounts receivable $63 $70 $77 15%Inventories $68 $74 $82 16%Other current assets $1 $1 $1 0% Total current assets $138 $152 $167 32%

Gross plant and equipment $461 $536 $612 106%Accumulated depreciation $167 $206 $250 39% Net plant and equip $294 $330 $363 68%Other assets $1 $1 $1 0%

Total assets $433 $483 $531 100%

Liabilities and EquityAccounts payable $19 $21 $23 4%Notes payable $2 $3 $2 0%Accruals $17 $19 $21 4%Other current liabs. $1 $1 $1 0% Total current liab $39 $44 $47 9%

LT debt $74 $75 $74 17%Min int. & other liab. $1 $1 $1 0%Def tax & other cred. $1 $1 $1 0% Total liabilities $115 $121 $123 27%

Preferred stock 86 86 86 20%

Common stock $ 14 $ 14 $ 14 3%Retained earnings $ 218 $ 262.0 308 50% Total common equity $ 231.5 $ 275.6 $ 322 53%

Total liabs & equity $432.99 $483.09 $531 100%


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TABLE IV: Income StatementSwan-Davis Incorporated

Forecasted Comparative Income StatementsFor years ending 1997-1999

1997 1998 1999 Common Size 1996Sales 629.20 692 761 100%Costs and expenses: COGS Excl. Depr. 503 554 609 80% Depreciation 36 39 43 6% Selling/admin 6 7 8 1% Other 3 3 4 1% Total costs 548.60 603 664 87%

0%Net oper. inc. (EBIT) 81 89 98 13%Interest 8 9 8 1%

0%EBT 72 80 89 11%Taxes 40% 29 32 36 5%

0%NI before pref div 43 48 54 7%Dividends to pref 6 6 6 1%

0%NI avail to common 37 42 48 6%

0%Dividends to common 0 0 0 0%Additions to ret earn 37 42 48 6%

Stock price, year-end 38.46 43.18 48.86Millions of shares 13.64 13.69 13.64Earnings per share 2.75 3.08 3.49Dividends per share 0.00 0.00 0.00Price/Earnings 14.00 14.00 14.00Dividend Yield 0.00 0.00 0.00


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TABLE IIV: Financial Ratios

1996Industry ------- --Projected------- -Average 1997 1998 1999

Liquidity: Current 2.6 3.5 3.5 3.5 Quick 1.4 1.8 1.8 1.8 CA/CL req. by cov.Asset Management: Inv t'novr (S/I) 9.3 9.3 9.3 9.3 Days sales out 36.2 36.2 36.2 36.2 Fixed asset turn 2.1 2.1 2.1 2.1 Total asset turn 1.4 1.5 1.4 1.4

Debt Management: Debt + Pref. ratio 42.4% 46.5% 42.9% 39.5% Equity multiplier 1.7 1.9 1.8 1.7 Times int earned 6.1 9.7 10.5 11.7

Profitability: Profit margin 6.4% 6.0% 6.1% 6.3% Basic earning power 20.3% 18.6% 18.4% 18.4% Return on assets 9.0% 8.7% 8.7% 9.0% Return on equity 15.6% 16.2% 15.3% 14.8%

Market Value: Price/Earnings 15.0 14.0 14.0 14.0 Market/Book 2.6 2.3 2.1 2.1

Du Pont Analysis: Profit margin 6.4% 6.0% 6.1% 6.3% Total asset turn 1.4 1.5 1.4 1.4 Equity multiplier 1.7 1.9 1.8 1.7

----- ----- ----- ----- Return on equity 16% 16% 15% 15%

----- ----- ----- ----- Check ROE 16% 16% 15% 15%Payout ratio 0.4 0.0 0.0 0.0 g(EPS) 0.1 0.2 0.2 0.1

Z score: 6.218033 6.431623 6.774212

CORRECT=> Z=.012(NWC/TA)+.014(RE/TA)+.033(EBIT/TA)+.006(MVC+PF)/BVD+.999(S/TA)

SDI A Case StudyBy: JNMorton

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TABLE IIIV AND XIHISTORICAL EVA/MVA CALCULATIONS, COMPANY

DATA ------- --Historical------- -----FORECASTED EVA/MVA CALCULATIONS-------1994 1995 1996 1997 1998 1999

kd 0.11 0.11 0.11 0.11 0.11 0.11 Tax rate 0.4 0.4 0.4 0.4 0.4 0.4 kp 0.105 0.105 0.105 0.105 0.105 0.105 kM 0.12 0.12 0.12 0.11 0.11 0.11 kRF 0.06 0.06 0.06 0.06 0.06 0.06 Beta 1.3 1.3 1.3 1.1 1.1 1.1 ks 0.138 0.138 0.138 0.115 0.115 0.115

WACC ### ### ### WACC ### ### ###EVA $9.70 ($1.13) ($15.63) EVA $7.59 $7.17 $7.37

MVA $252.7 $73.7 $10.6 MVA $293.1 $315.5 $344.8


DATA TABLE X: Look at Sensitivity of EPS When Sales Growth Changes

This is a DATA TABLE 1: We look at how a change in one input variableaffects one or more outputs.

1997 1998 1999Sales g EPS EPS EPS

2.75 3.08 3.49-0.05 2.274 2.549 2.639

-0.025 2.353 2.633 2.7690 2.431 2.719 2.904

0.025 2.510 2.807 3.0430.05 2.589 2.897 3.187

0.075 2.668 2.990 3.3360.1 2.747 3.084 3.490

0.125 2.826 3.180 3.6500.15 2.905 3.279 3.814


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DATA TABLE IX: Look at Sensitivity of 1997 EPS When Sales Growth and Cost of Goods Sold Percentage Changes

This is a DATA TABLE 2: We look at how changes in two input variablesaffect one output.

1997 EPSSales g - Cost of Goods Sold Percentage---- -2.74687561 0.74 0.76 0.78 0.8 0.82 0.84 0.86

-0.05 3.799 3.291 2.782 2.274 1.765 1.256 0.748-0.025 3.918 3.396 2.874 2.353 1.831 1.309 0.787

0 4.037 3.502 2.967 2.431 1.896 1.361 0.8250.025 4.156 3.608 3.059 2.510 1.962 1.413 0.864

0.05 4.275 3.713 3.151 2.589 2.027 1.465 0.9030.075 4.394 3.819 3.243 2.668 2.093 1.517 0.942

0.1 4.514 3.925 3.336 2.747 2.158 1.569 0.9800.125 4.633 4.030 3.428 2.826 2.223 1.621 1.019

0.15 4.752 4.136 3.520 2.905 2.289 1.673 1.058


` 28DATA TABLE IIX: Look at Sensitivity of 1997 Current Ratio When Sales

Growth and Cost of Goods Sold Percentage ChangesThis is a DATA TABLE 2: Here we look at how changes in two inputvariables affect one output.

1997 Current RatioSales g - Cost of Goods Sold Percentage---- -

3.5069542 0.74 0.76 0.78 0.8 0.82 0.84 0.86-0.05 4.752 4.280 3.893 3.570 3.297 3.062 2.859

-0.025 4.731 4.262 3.878 3.558 3.286 3.053 2.8510 4.711 4.246 3.865 3.547 3.277 3.045 2.844

0.025 4.692 4.231 3.852 3.536 3.267 3.037 2.8370.05 4.674 4.216 3.840 3.526 3.259 3.029 2.830

0.075 4.657 4.203 3.829 3.516 3.251 3.022 2.8240.1 4.641 4.190 3.818 3.507 3.243 3.016 2.818

0.125 4.626 4.177 3.808 3.498 3.235 3.009 2.8130.15 4.612 4.165 3.798 3.490 3.228 3.003 2.807


29DATA TABLE IIIX: Look at Sensitivity of 1997 TIE Ratio When Sales

Growth and Cost of Goods Sold Percentage ChangesThis is a DATA TABLE 2: We look at how changes in two input variablesaffect one output.

1997 TIE RatioSales g - Cost of Goods Sold Percentage---- - -

9.6857606 0.74 0.76 0.78 0.8 0.82 0.84 0.86-0.05 17.013 13.630 10.882 8.605 6.688 5.052 3.639

-0.025 17.508 13.984 11.138 8.790 6.820 5.144 3.7000 18.005 14.338 11.392 8.972 6.950 5.235 3.761

0.025 18.504 14.692 11.645 9.153 7.078 5.324 3.8210.05 19.007 15.045 11.896 9.332 7.205 5.412 3.879

0.075 19.512 15.398 12.146 9.510 7.330 5.498 3.9360.1 20.020 15.751 12.394 9.686 7.454 5.583 3.993

0.125 20.530 16.103 12.642 9.860 7.576 5.667 4.0480.15 21.044 16.456 12.887 10.033 7.697 5.750 4.103


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Swan-Davis Inc.(1) Final(1)(1)

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