Sharon Bates graduated from college six years ago with a finance undergraduate degree. Although she is...

 

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Sharon Bates graduated from college six years ago with a finance undergraduate degree. Although she is satisfied with her current job, her goal is to become an investment banker. She feels that an MBA degree would allow her to achieve this goal. After examining schools, she narrowed her choice to Mount Perry College. Although internships are encouraged by the business school to get class credit for the internship, no salary can be paid. Other than internships, the school doesn't allow its students to work while enrolled in its MBA program. Sharon currently works at the money management firm of Dewey and Louis. Sharon's annual salary at the firm is $120,000 per year, and her salary is expected to increase by 2.5 percent per year until retirement. She is currently 28 years old and expects to work for 40 more years and retire at age 68. Her current average tax rate is 26 percent. For simplicity, the annual salary is received at the end of the year. Mount Perry College began its MBA program 76 years ago. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $70,000, payable at the beginning of each school year. Sharon expects that after graduation from Mount Perry, she will receive a job offer for about $250,000 per year, with a $30,000 signing bonus. The signing bonus will be paid at the end of year 2 and taxed at her salary tax rate. The first salary will be paid at the end of year 3. Sharon doesn't plan to extend her retirement age, and the last salary payment will be at the end of year 40 (i.e., when Sharon is 68). The salary is expected to increase by 3.5 percent per year. Because of the higher salary, her average income tax rate will increase to 31 percent. Both salary and bonus components are taxed at the average tax rate. Sharon's appropriate discount rate is 6.3 percent per year. h n T et Questions: 1. What is the best option for Sharon-from a strictly financial standpoint (i.e., the one with the higher PV)? (70 points: 30 and 40) 2. Dewey and Louis heard about Sharon's plans and wanted to make her an offer that would keep her in her current position. Assume that the tax rate will increase to 31% from 26%. All other parameters remain unchanged (N=40, g=2.5%, r=6.3%). What would her updated annual salary be? (30 points) 1 Notes for solution: r e S d r d 1. Assume that all salaries are paid at the end of each year. Tuition expenses are not tax deductible. 2. Dewey and Louis's PV calculation is straightforward and based on a growing annuity. PV-S Salary(1-tax) 1-8 1+g 3. The PV of Mount Perry includes both income and expense components. So calculate the PV of both and report the net. Make sure to find the PV at time 0. 4. For question 2, Dewey and Louis will match the PV found in question 1 by updating Sharon's salary: PV. Mount Perry Updated Salary(1-tax) r-g 1+r Sharon Bates graduated from college six years ago with a finance undergraduate degree. Although she is satisfied with her current job, her goal is to become an investment banker. She feels that an MBA degree would allow her to achieve this goal. After examining schools, she narrowed her choice to Mount Perry College. Although internships are encouraged by the business school to get class credit for the internship, no salary can be paid. Other than internships, the school doesn't allow its students to work while enrolled in its MBA program. Sharon currently works at the money management firm of Dewey and Louis. Sharon's annual salary at the firm is $120,000 per year, and her salary is expected to increase by 2.5 percent per year until retirement. She is currently 28 years old and expects to work for 40 more years and retire at age 68. Her current average tax rate is 26 percent. For simplicity, the annual salary is received at the end of the year. Mount Perry College began its MBA program 76 years ago. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $70,000, payable at the beginning of each school year. Sharon expects that after graduation from Mount Perry, she will receive a job offer for about $250,000 per year, with a $30,000 signing bonus. The signing bonus will be paid at the end of year 2 and taxed at her salary tax rate. The first salary will be paid at the end of year 3. Sharon doesn't plan to extend her retirement age, and the last salary payment will be at the end of year 40 (i.e., when Sharon is 68). The salary is expected to increase by 3.5 percent per year. Because of the higher salary, her average income tax rate will increase to 31 percent. Both salary and bonus components are taxed at the average tax rate. Sharon's appropriate discount rate is 6.3 percent per year. h n T et Questions: 1. What is the best option for Sharon-from a strictly financial standpoint (i.e., the one with the higher PV)? (70 points: 30 and 40) 2. Dewey and Louis heard about Sharon's plans and wanted to make her an offer that would keep her in her current position. Assume that the tax rate will increase to 31% from 26%. All other parameters remain unchanged (N=40, g=2.5%, r=6.3%). What would her updated annual salary be? (30 points) 1 Notes for solution: r e S d r d 1. Assume that all salaries are paid at the end of each year. Tuition expenses are not tax deductible. 2. Dewey and Louis's PV calculation is straightforward and based on a growing annuity. PV-S Salary(1-tax) 1-8 1+g 3. The PV of Mount Perry includes both income and expense components. So calculate the PV of both and report the net. Make sure to find the PV at time 0. 4. For question 2, Dewey and Louis will match the PV found in question 1 by updating Sharon's salary: PV. Mount Perry Updated Salary(1-tax) r-g 1+r

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Lets tackle each question one by one Question 1 What is the best option for Sharon from a strictly financial standpoint ie the one with the higher PV 70 points 30 and 40 To determine the best option f... View the full answer