The value of a fixed rate bond with fifteen years left to maturity

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A. Calculate the value of a fixed rate bond with fifteen years left to maturity, annual coupon payments at a coupon rate of 5.0%, face value of $1,000, and yield-to-maturity of 3.5%. hint: See solution for similar problem in lecture presentation on Bonds. Should the calculated value be greater than or less than $1,000?

B. Calculate the value of a fixed rate bond with fifteen years left to maturity, annual coupon payments at a coupon rate of 3.5%, face value of $1,000, and yield-to-maturity of 5%. hint: See solution for similar problem in lecture presentation on Bonds. Should the calculated value be greater than or less than $1,000?

C. Calculate the value of a fixed rate bond with fifteen years left to maturity, semi-annual coupon payments at a coupon rate of 5.0%, face value of $1,000, and yield-to-maturity of 3.5%. hint: See solution for similar problem in lecture presentation on Bonds. Should the calculated value be greater than or less than $1,000?

D. What is the yield-to-maturity of a corporate bond that has face value of $1,000, annual coupon payments of $35, is being quoted at 102.5, and has seven years left to maturity? hint: You need to use the Excel RATE function.

E. Calculate the value of a preferred stock with a fixed annual dividend of $2.45, assuming a discount rate of 9.5%. Solve the problem two different ways: first by using the algebraic formula for a constant dividend preferred stock, then by using the built-in Excel function PV. hint: Use the Preferred Stock example in the posted DDM Excel Examples file as a guide. Feel free to copy the worksheet and make the minor necessary changes to answer this question.

F. Calculate the value of a stock with an expected annual dividend of $2.00 next year and estimated annual dividend growth of 2% per year indefinitely. Assume a discount rate of 8%. Solve the problem two different ways: first by using the algebraic formula for the Gordon Growth Model, then by using Excel to calculate and sum the dividends and their respective present values for the next 150 years. hint: Use the PV Const Growth Dividend example in the posted DDM Excel Examples file as a guide. Feel free to copy the worksheet and make the minor necessary changes to answer this question.

G. Calculate the value of a stock with the following expectations for dividend payments: $1.75 in Year 1, $2.00 in Year 2, and then annual dividend growth of 1.5% per year indefinitely. Assume a discount rate of 9%. Solve the problem two different ways: first by using the algebraic formula for the Gordon Growth Model combined with PV of uneven dividend payments, then by using Excel to calculate and sum the dividends and their respective present values for the next 150 years. hint: Use the Uneven, then Const. Growth Div example in the posted DDM Excel Examples file as a guide. Feel free to copy the worksheet and make the minor necessary changes to answer this question.

H. Calculate the value of a stock with the following expectations for dividend payments: $1.75 in Years 1, 2 and 3, and then annual dividend growth of 1.5% per year indefinitely. Assume a discount rate of 9%. Solve the problem two different ways: first by using the algebraic formula for the Gordon Growth Model combined with PV of uneven dividend payments, then by using Excel to calculate and sum the dividends and their respective present values for the next 150 years. hint: Use the Uneven, then Const. Growth Div example in the posted DDM Excel Examples file as a guide. Feel free to copy the worksheet and make the minor necessary changes to answer this question.

• Ch 7 – DDM Excel Examples.xlsx

Sample Solution

It is apparent that the United States has a problem, but what are some solutions to to this crisis?  Unfortunately, there is no simple solution to this complex problem, but in order to move forward, we propose several methods that may incite change in the current system in place.  Historically, pharmaceutical companies dictate pricing with no restrictions from Medicare, Medicaid, or Federal/State governments. The US government (i.e. Medicare, Medicaid, Tricare, etc.) is the largest buyer of prescription drugs in the world, yet they have no say in the pricing of drugs.  Our government also generally issues funds to these pharmaceutical companies for research and development, with substantial investments in the basic science that leads to new drug discoveries. For example, the federal government spent $484 million developing the cancer drug Taxol, which was then taken under agreement with Bristol-Myers Squibb in 1993.  In 10 years, the manufacturer earned $9 billion in revenue and paid the federal government $35 million in royalties (article). Although 75% of new innovative drugs are supported by federal funding, most consumers and payers are unable to afford these medications due to the unreasonable prices. (article) We propose for the United States government to have the ability to establish delegated sectors to negotiate drug prices.  By giving the government some power in dictating cost, this could substantially lower introductory prices, annual costs, and which may reduce out-of-pocket costs for patients. For example, the government may establish a drug’s ceiling price similar to the Federal Ceiling Price program used by the Department of Veteran Affairs. They may also begin use of reference pricing, thus permitting the Department of Health and Human Services to set a benchmark price for clinically comparable drugs that are interchangeable. Though these changes may produce more cost-effective medication, a drawback may be the lack of market diversity. Rather than having one pharmaceutical company dictating the price, the federal government is dictating the price thus creating a lack of competition. Having one body dictate everything may create tensions between pharmaceutical companies and the government; thus, change might not be made at all.
Next, pharmaceutical companies spend a substantial amount of money on marketing rather than research.  At this point, we are unaware of the exact cost breakdown of pharmaceutical company revenue. There is no requirement for documentation to show the difference between profits, money used for marketi

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