Wayne Rooney signed a four-year extension to his contract with Manchester United in February 2014. Manchester United is required to pay $15.6 million per year until June 2019 which amounts to $300,000 per week. However, this amount is taxable. Assume a UK tax rate of 45%. The effective date of the new contract extension begins on 1 July 2015. The current contract which is for $250,000 per week, comes to an end on 30 June 2015. It has been reported however that Rooney's endorsement earnings of $1.8 million per year were significantly less than that of Messi and Christian Ronaldo. The Portuguese footballer is expected to earn $15 million in endorsement earnings for the year up to June 2015. He has other earnings from projects such as his underwear line CR7, which we will ignore. Earnings from image rights are expected to grow by 7% per year after 2016 until 2019. Ronaldo's after tax salary (with bonuses) until 30 June 2015 is $15 million per year. Image rights for Rooney are expected to grow by 7% per year from 2014.
Ronaldo signed a new contract with Real Madrid to extend his contract, which expires in June 2015, for another three years until 2018. We will however, assume that he will be able to renew his contract for a further year until June 2019, on the same terms. The new salary (after tax) amounts to $17.6 million per year and Ronaldo will become the highest paid footballer in the world. Ronaldo won the Ballon d' Or again in 2014 and Ronaldo scored over 225 goals for Real Madrid upto 2013. In terms of image rights, Ronaldo split his income 60-40 with the club but his share has been increased under the new contract. Ronaldo's salary is after tax but you assume he pays 52% tax rate on his earnings from his image rights. The relevant interest rate is 5% per year. We will assume that all payments to the players occur at the end of each year. Assume that the current date is 1 July 2014.

Required:

What is the present value of Rooney's after tax earnings at 1 July 2014? What is the present value of Ronaldo's after tax earnings on the same date? How do they compare and what can you conclude about the players most valuable status?

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Payments are made at the end of the period hence a contract that begins on 01Jul2015 makes its first payment on 01July2016 Thus the 4 payments of 1560 ... View the full answer