Homework_1_Solutions

Homework_1_Solutions - UNIVERSITY OF NORTH CAROLINA AT...

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U NIVERSITY OF N ORTH C AROLINA A T C HAPEL H ILL K ENAN -F LAGLER B USINESS S CHOOL B USI 408: C ORPORATE F INANCE S OLUTIONS TO A SSIGNMENT #1 P ROF . A RZU O ZOGUZ F ALL 2009 1. Answer questions 3-5 of the mini case at the end of Chapter 4. He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA. In this analysis, room and board costs are irrelevant since presumably they will be the same whether he attends college or keeps his current job. We need to find the after-tax value of each, so: Question 3: Remain at current job : After-tax salary = $50,000(1 – .26) = $37,000 His salary will grow at 3 percent per year, so the present value of his after-tax salary is: ܸܲ ൌ 37,000 ൦ 1െ ቀ 1.030 1.065 ଷହ 0.065 െ 0.03 ൪ ൌ ૠ૛ૡ, ૡૢ૟. ૛૜ Wilton MBA: Costs: Total direct costs = $60,000 + 2,500 + 3,000 = $65,500 PV of direct costs = $65,500 + 65,500 / (1.065) = $127,002.35 PV of indirect costs (lost salary) = $37,000 / (1.065) + $37,000(1 + .03) / (1 + .065) 2 = $68,341.82 Future Salary: PV of after-tax bonus paid in 2 years = $15,000(1 – .31) / 1.065 2 = $9,125.17 After-tax salary = $95,000(1 – .31) = $65,550 His salary will grow at 4 percent per year. We must also remember that he will now only work for 33 years, so the present value of his after-tax salary is: ܸܲ ൌ 65,550 ൦ 1െ ቀ 1.040 1.065 ଷଷ 0.065 െ 0.04 ൪ ൌ 1,424,719.72
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Since the first salary payment will be received three years from today, so we need to discount thi s for two years to find the value today, which will be: PV = $1,424,719.72 / 1.065 2 PV = $1,256,117.37 So, the total value of a Wilton MBA is: Value = –$68,341.82 – 127,002.35 + 9,125.17 + 1,256,117.37 = $1,069,898.38 Mount Perry MBA : Costs: Total direct costs = $75,000 + 3,500 + 3,000 = $81,500. Note, this is also the PV of the direct costs since they are all paid today. PV of indirect costs (lost salary) = $37,000 / (1.065) = $34,741.78 Future Salary: PV of after-tax bonus paid in 1 year = $10,000(1 – .29) / 1.065 = $6,666.67 After-tax salary = $78,000(1 – .29) = $55,380 His salary will grow at 3.5 percent per year. We must also remember that he will now only work for 34 years, so the present value of his after-tax salary is: ܸܲ ൌ 55,380 ൦ 1െ ቀ 1.035 1.065 ଷସ 0.065 െ 0.035 ൪ ൌ 1,147,258.87 Since the first salary payment will be received two years from today, so we need to discount this for one year to find the value today, which will be: PV = $1,147,257.88 / 1.065 PV = $1,077,237.44
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This document was uploaded on 11/04/2011 for the course BUSI 408 at UNC.

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Homework_1_Solutions - UNIVERSITY OF NORTH CAROLINA AT...

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