Analysts on Wall Street get paid enormous amounts of money to leave their current firm and...

Analysts on Wall Street get paid enormous amounts of money to leave their current firm and bring their clients and business with them to a new firm. The bonus structure for bringing new business to a firm was spread over 6 years. The average analyst was paid $16 million immediately to leave their old firm, $6.5 million at the end of year 1, $7 million at the end of year 2, $8.5 million at the end of year 3, $9 million at the end of year 4, $9 million at the end of year 5, and $11.5 million at the end of year 6. If the appropriate interest rate is 8% APR, what is the value of the deal today? Assume all payments other than the first $16 million are paid at the end of the year.

a. $38,754,932.47

b. $54,754,932.47

c. $49,209,439.75

d. $22,754,932.47

Solutions

Expert Solution

Present value=Cash flows*Present value of discounting factor(rate%,time period)

=16,000,000+6,500,000/1.08+7,000,000/1.08^2+8,500,000/1.08^3+9,000,000/1.08^4+9,000,000/1.08^5+11,500,000/1.08^6

which is equal to

=$54,754,932.47(Approx)

jeff jeffy answered 2 years ago

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