U
NIVERSITY OF
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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
1 െ ቀ
1.030
1.065
ቁ
ଷହ
0.065 െ 0.03
൪ ൌ ૠૡ, 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
1 െ ቀ
1.040
1.065
ቁ
ଷଷ
0.065 െ 0.04
൪ ൌ 1,424,719.72

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