Acme Medical Corp.

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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

ntent, but comprehensive guidance on teaching the content – so that each learning resource comes with instructions and examples of ‘how to teach’. This is especially important in developing countries where the teachers’ knowledge and skills are low. Online teacher communities will continue to become more and more important as centres for the sharing of resources, practice and mutual support.
Subject-wise, although traditional emphasis has always been on STEM subjects, the overriding priority for education systems is, and will continue to be, literacy.
In most countries Technical and Vocational Education will become increasingly important, especially as economies move from the production of simple commodities (agriculture, raw materials) to complex (manufactured goods, technology and services). The biggest challenge for TVE from a teaching and learning perspective is assessment – how do we define competencies and skills in this sector, and how do we assess and certify them to international standards? Technology that allows for the assessment of complex skills both in the classroom and onsite (through mobile devices) would be extremely valuable. There is also an opportunity to use A.I. for this, as it will allow for the assessment of intricate tasks and projects beyond simple testing.
We are seeing a move away from high stakes international testing (such as PISA, TIMS etc.) and the use of statistics and Big Data in education. There has been little evidence to date that these systems are useful to course correct or inform policy and practice. Despite the efforts of bodies like the OECD these tests struggle to assess the complex competencies and skills that will increasingly be needed over the next few years. While they have certain political currency, the impact on classroom practice appears to be largely negative as teachers are under increasing pressure to compile data, which detracts from teaching itself, and teach to the test. National boards, like OFSTED in the UK, are now moving away from the statistical ‘evidence of progress’ towards inspections focussed on the quality of teaching and learning in the classroom and we are seeing similar trends worldwide.
In summary – for centralised and developing education systems the next three to five years will see:
1. The need for standardised and central administrative control over resources, content and the implementation of technology in the classroom.
2. An increasing focus on Technical and Vocational Education and a growing demand for ef

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