Question

In: Finance

Today is your first day at the investment banking firm of Dewey, Cheatum and Howe. They...

Today is your first day at the investment banking firm of Dewey, Cheatum and Howe. They have offered you a choice between two different compensation arrangements. You can have a salary of $95,000 per year for the next two years, or you can have a salary of $84,000 per year for the next two years and a signing bonus $20,000 that is paid today. The bonus is paid immediately and the salary is paid in equal amounts at the end of each month. If the interest rate is 8 percent compounded monthly, which compensation program do you prefer? Explain why. If the interest rate is 18 percent compounded monthly, which compensation program do you prefer? Explain why. do not use excel or a calculator to solve

Solutions

Expert Solution

Option 1
Salary of 95000 per year
Monthly Salary = P = 95000/12
Interest Rate = r = 8% = 0.08/12
Number of months = n = 24
Present Value of future salary payments = P/(1+r) + P/(1+r)2 +....+ P/(1+r)n = P[1- (1+r)-n]/r = (95000/12)[1- (1+0.08/12)-24]/(0.08/12) = $175041.80

Option 2
Salary of 84000 per year
Monthly Salary = P = 84000/12
Interest Rate = r = 8% = 0.08/12
Number of months = n = 24
Present Value of future salary payments = P/(1+r) + P/(1+r)2 +....+ P/(1+r)n = P[1- (1+r)-n]/r = (84000/12)[1- (1+0.08/12)-24]/(0.08/12) = $154773.81
Signing Bonus = $20000
Present Value of future salary + bonus = $174773.81

Hence, option 1 is better. This is because a lumpsum is received initially and there is no effect of discounting on this lumpsum.

Interest Rate = 18%

Option 1
Salary of 95000 per year
Monthly Salary = P = 95000/12
Interest Rate = r = 18% = 0.18/12
Number of months = n = 24
Present Value of future salary payments = P/(1+r) + P/(1+r)2 +....+ P/(1+r)n = P[1- (1+r)-n]/r = (95000/12)[1- (1+0.18/12)-24]/(0.18/12) = $158574.04

Option 2
Salary of 84000 per year
Monthly Salary = P = 84000/12
Interest Rate = r = 8% = 0.18/12
Number of months = n = 24
Present Value of future salary payments = P/(1+r) + P/(1+r)2 +....+ P/(1+r)n = P[1- (1+r)-n]/r = (84000/12)[1- (1+0.18/12)-24]/(0.18/12) = $140212.84
Signing Bonus = $20000
Present Value of future salary + bonus = $160212.84

In this scenario, option 2 is better


Related Solutions

You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two...
You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two different salary arrangements. You can have $111,000 per year for the next two years, or you can have $40,000 per year for the next two years, along with a $25,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. Required: (a) If the interest rate is 7 percent compounded monthly, what is the present...
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two...
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $85,000 per year for the next two years, or you can have $74,000 per year for the next two years, along with a $30,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month. If the interest rate is 9 percent compounded monthly, what is the...
Your broker, the leading sales generator at the firm Dewey, Cheatem and Howe, calls you with...
Your broker, the leading sales generator at the firm Dewey, Cheatem and Howe, calls you with an investment opportunity. If you send him $2000 today, he will send back to you $1050 a year from now, and $1300 a year after that. You require a 12% annual return. Based on the present value of these future cash flows, is this a good investment? Yes No
Mr. Howe, a Partner of the CPA firm Dewey, Cheatem & Howe (DC&H), after reviewing an...
Mr. Howe, a Partner of the CPA firm Dewey, Cheatem & Howe (DC&H), after reviewing an audit of “GUBER EATS” by DC&H has become concerned that GUBER EATS is not paying the National minimum wage of $19.49/hr. When he talked to the manager of GUBER EATS, Mr. Howe was informed that this was not a minimum-wage issue because the international students delivering for GUBER EATS are independent contractors (e.g. they set up companies and registered for ABNs). Also, the $16.50/hr...
Maria is a Paralegal at Dewey, Cheatham & Howe, a law firm in Arizona. Information about...
Maria is a Paralegal at Dewey, Cheatham & Howe, a law firm in Arizona. Information about her 2018 income and expenses is as follows: Income received Salary                                                                                      $150,000 Taxes withheld from Salary: Federal Income tax                 $30,000 State Income Tax                         9,000 Social Security Tax                      7,961 Medicare Tax 2,175 Interest income from bank                                                            6,000 Dividend income from U.S. Stocks                                                4,000 Short-Term Capital Gain 2,000 Long-Term Capital Gain 3,000 State income tax refund from last year 500 Expenses Paid: Unreimbursed dental and eye-care costs 1,800 Property taxes on her...
you have just joined the investment banking firm of dewey cheated and howe.They have offered you...
you have just joined the investment banking firm of dewey cheated and howe.They have offered you two different salary arrangements.you can have 8100$ per month for the next three years or you can have 6800$ per month for the next three years. along with a 36500$ signing bonus today.assume the interest rate is 8 percent compounded monthly. if you take thef
The law firm of Dewey, Cheethan, and Howe files claims against unscrupulous car repair shops that...
The law firm of Dewey, Cheethan, and Howe files claims against unscrupulous car repair shops that take advantage of consumers who know nothing about cars. A lawyer who takes a 20-minute break after every two hours of work can process one claim with six hours of work. If the lawyer takes a 20-minute break after every four hours of work she can process one claim with eight hours of work. If she takes a 20-minute break after every hour of...
5) Four Months after the audit firm of Dewey, Cheatem, & Howe issued an Unqualified opinion...
5) Four Months after the audit firm of Dewey, Cheatem, & Howe issued an Unqualified opinion that the F/S of Crook Puppy Investments (CPI) Ltd (an investment form registered with ASIC) were True and Fair, the Australian Federal Police (AFP) raided the offices of CPI, found that CPI had been engaged in money laundering for two Bikie Gangs, seized CPI’s resources as the proceeds of crime, and shut the firm down. Shortly there-after, CPI declared bankruptcy and was able to...
Assume that today is the first day of the month and that it is also your...
Assume that today is the first day of the month and that it is also your first day of retirement. You have saved for retirement over the years and have accumulated $310,000 in an investment account from which you plan to make monthly withdrawals during your retirement starting at the end of this month. Assuming you can earn annual returns of 6.4% in your investment account during your retirement years, how much money can you withdraw every month to make...
5. The management of Dewey, Cheatham & Howe, a private hospital is considering automating some back...
5. The management of Dewey, Cheatham & Howe, a private hospital is considering automating some back office functions. This would replace five personnel that currently cover three shifts per day, 365 days per year. Each person earns $35,000 per year. Company-paid benefits and overhead are 45% of wages. Money costs (use this as MARR) 8%. Combined federal and state taxes total 40%. Annual property taxes and maintenance are 2.5% and 4 % of the investment cost, respectively. Depreciation is 15-year...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT