Acme Medical Corp.

 

 

1. Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
A. What is the value of this bond?
B. Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in ten years. What is the value of this bond?
C. What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
D. Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?

2. The XYZ Corporation pays a dividend of $1 for each share and its required rate of return is 8%. Answer the following questions:
A. Assuming zero growth in dividends, what is the value of each share?
B. Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
C. Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?

3. Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below calculate the following:
A. What is the present value of Acme’s future cash flows using the discounted cash flow model?
B. If the firm has 200,000 common shares outstanding, zero preferred shares, and debt with a market value of $10,000,000 what would be the value of each share?
C. Now suppose the discount rate increases to 10%. How would your answers to a) and b) above change based on the new discount rate?

Year Cash flow
2018 500,000
2019 550,000
2020 620,000
2021 700,000
2022 800,000

4. Suppose the Alpha Manufacturing Corporation is experiencing extreme financial difficulties and is considering bankruptcy. Its shareholders are currently almost equally divided about whether or not the company should go bankrupt, with one outspoken faction pushing for bankruptcy and the other strongly opposing it. They have $50 million in debt all in the form of bonds, and bondholders are pretty well united in that they want the firm to declare bankruptcy.
A. The CEO announces that he is leaning against bankruptcy. This means one faction of shareholders is happy, but another faction of shareholders is very upset and the bondholders are also unhappy. Can the unhappy faction of shareholders team up with the bondholders to vote out the CEO? Explain your reasoning using references from the background readings.
B. Suppose Alpha ends up declaring bankruptcy. They do not have any cash in the bank but they own $60 million worth of real estate. They only have one type of shareholder—common shareholders. If they sell the real estate, how much of this will bondholders get and how much with shareholders get? Explain your reasoning using references from the background readings.
C. Now suppose that Alpha has two classes of shareholders—common shareholders and preferred shareholders. Preferred shareholders are owed $20 million in dividends that have been unpaid in the last two years. If Alpha goes bankrupt and sells its $60 million worth of real estate, how much will bondholders get, how much will common shareholders get, and how much will preferred shareholders get? Explain your reasoning using references from the background readings.

 

 

 

 

 

 

 

 

Sample Solution

have instated a Communist regime, was widely spread and, as Folch-Serra argues ‘systematically enforced through schools and textbooks, the pulpit, the Fascist institutions and the media’ (p. 228). There was heavy censorship of news that could have challenged this image, which Folch-Serra shows was ‘illustrated by the Spanish media’s disregard of the Nobel prizes awarded to Juan Ramón Jiménez for literature in 1956 and Severo Ochoa for science in 1959’ (p. 229). This leads on to the contradictory nature of Franco’s treatment of the Republicans since, as well as spreading defamatory comments about their nature, there was also, as Folch-Serra explains, a ‘suppression of information about their fate and whereabouts’ (p. 229) which drew from a ‘deliberate policy of oblivion and silence’ (p. 229). By winning the Civil War, Franco also won the fortune of being able to rewrite history and, as Folch-Serra confirms, he was able to ‘concoct a uniform image of the defeated as one and the same’ (p. 227). Amongst other forms of propaganda, education allowed Franco to disseminate his version of events as truth, which can be seen through school textbooks which Xavier Laudo elaborates on how they ‘spoke of the desertion of Republican soldiers’ as well as presenting Republican Spain as the ‘enemy within’ (p. 442) who were ‘responsible for the erosion of the nation’s Christian faith’ (p. 442). Assmann further shows how this ‘one sided version of history’ (p. 64) not only ‘protected’ (p. 65) and legitimised Franco, but also ‘prolonged the enemy stereotype of the murdered communists and democrats’ (p. 65). Thus, it can be seen that Franco manipulated the memory of the Civil War during his dictatorship and how his policies towards the Republicans after the war allowed him to promote his narrative as the truth and legitimise his position. This collective amnesia that Franco wanted to induce, discredited and erased his opponent from history. However, Assmann adds that this ‘silence did not dissolve the memory of the traumatic past’ (p. 66) and did not fully discredit his opponents, as individual memories of the events were ‘materially preserved in the earth and in families’ (p. 66). Memory also featured heavily in Franco’s propaganda, with many references made to returning Spain to the greatness it had once experienced. Franco’s message regarding the Republicans was spread through education and Laudo explains that so was the image of the Civil War as a ‘crusade’ (p. 438) such as during the Middle Ages. Zheng Wang describes how school textbooks can be used as ‘instruments for glorifying the nation, consolidating its national identity and justifying particular forms of social and political systems ‘ and how the rewriting of school textbooks can be used to ‘legitimise the new regime’ (p. 45). This is evident on the front cover of El Libro de España, which features a boat sailing across the globe, against the backdrop of the Spanish flag. This reminds the viewer of the Spanish Empire, as Laudo confirms, ‘stressing the cross-Atlantic colonialist adventures in the Americas’ (p. 443), and the power and glory that this brought, ‘promoting a spirit of patriotism’ (p.443). Through this, Laudo explains that Franco was able to propagate his ‘vision of Spain’s history, its Hispanic mission for imperial glory’ (p. 453). Religious references were frequently seen in Franco’s propaganda, and comparisons were made to the Catholic monarchs and the unity and greatness Spain experienced under them. Miriam

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