Case Study

Robertos Good Fortune

Roberto Cement has been a baseball player all of his life, and recently was drafted by a professional

team to play in the major leagues (late 2019). Right now his plan was to play with a minor league club

while his contract negotiations are being finalized with the team that drafted him.

Roberto has played baseball in an organized league since he was seven years old, and was a

standout/star player in high school and college. He had been recruited by a number of colleges, and

decided on the one that had the best record of sending players to the major leagues. He was in his

junior year of college when he decided to declare himself eligible for the draft and thats what he did.

Just before the draft, Roberto took his fathers advice and hired an agent to help him navigate the

process of the draft and the follow up negotiations with the professional team that would most likely

draft him. He finally chose an agent who was an acquaintance of his friend and fellow baseball player,

Barry, who had been drafted several years ago.

Robertos agent, Marvin Moneybags, thinks he knows what the offer will be from the major league club.

And, he believes he has a better counterproposal. Roberto has also been talking to a friend who has

been playing in the major leagues for about five years, and came through the system very similarly to

the way Roberto is managing his career. This friend, Barry (referred to previously), also has suggested

some contract ideas and a starting point for negotiations. Robertos contract with Marvin (his agent) will

run for the same term as the contract with the team, and will be renegotiated toward the end of the 5

year term of the original contract.

Roberto, his friend Barry, and his agent Marvin finally developed three offers/proposals that they

thought are the most likely scenarios, and they are as follow:

Offer #1

1. The offer from the team, which Marvin is pretty sure of, consists of the following:

A $125,000 signing bonus to be received in cash on the day of signing the contract.

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A five-year contract for $240,000 per year, paid at the beginning of the year, with some

additional incentive money if he performs above certain criteria.

The incentive money consists of a lump sum amount of $35,000 to be received at the end of

each year for the five-year contract term, if he meets the incentive requirements.

A re-signing bonus of $200,000 to be paid at the end of his contract term, if both he and the

team decide to enter into a new contract.

Offer #2

2. The second offer to consider is Marvins counterproposal, which is structured as follows:

A $160,000 signing bonus to be received in cash on the day of signing the contract.

A five-year contract for $250,000 per year, paid at the beginning of the year, with some

additional incentive money if he performs above certain criteria.

The incentive money consists of a lump sum amount of $40,000 to be received at the end of

each year for the five-year contract term, if he meets the incentive requirements.

A re-signing bonus of $200,000 to be paid at the end of his contract term if both he and the

team decide to enter into a new contract.

Offer #3

3. The third offer/proposal that Roberto is considering is the one that he and his friend worked on

together. They both feel that this is in Robertos best interest.

A $175,000 signing bonus to be received in cash on the day of signing the contract.

A five-year contract for $270,000 per year, paid at the beginning of each year, with some

additional incentive money if he performs above certain criteria.

The incentive money would consist of a lump sum amount of $60,000 to be received at the

end of each year for the five-year contract term, if he meets the incentive requirements.

No re-signing bonus at the end of the contract term. Robertos friend thinks that the best

approach is to negotiate from the perspective of becoming a free agent if hes doing really

well, it puts additional pressure on the team to come up with even more money in a re-

signing bonus situation.

Roberto and his friend, Barry, know that they will need some help in analyzing these offers. Neither of

them had any business courses in college, and certainly dont know about the time value of money.

However, they both know you (you went to college with them and went on to get your masters degree)

and they also know that you are good at analyzing relevant cash flows and financial situations.

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Roberto and Barry have enlisted your support and would like the following questions answered, given

the assumptions of an interest rate (or discount rate) of 7% for all three proposals, and have asked that

you round the computations to the nearest dollar:

1. From a financial and time value of money perspective, you will analyze each offer. Youve told

them that you will have to calculate all of the future cash flows discounted back to the present to

be able to compare the three offers fairly and effectively.

Find the total present value (PV) of each of the three offers.

2. Which offer is best, based strictly on the financial calculations (#1 Team Offer; #2 Marvins

counterproposal; #3 Roberto and Barrys proposal)?

And why?

3. What additional considerations should Roberto think about in terms of:

the amounts and timing of the cash flows?

the incentive component of the offer?

the re-signing bonus (or absence of one, as in the third offer)?

4. Which offer do you think Robertos agent, Marvin, will recommend?

And why?

(Note: Marvin will probably get about 10% of the total contract value, not including the

incentives, but including both signing and re-signing bonuses.)

5. Are there any other choices or options that Roberto could evaluate, other than those being

considered here? What are your ideas?

[Note: This question addresses section E (Other Options) in the Case Study Methodology]

6. Which offer do you recommend for Roberto, given all of the considerations?

[Note: This question addresses section F (Your Prediction) in the Case Study Methodology