Question

II. You are the chairman of the board of directors for an innovative technology company, and you are looking to hire a new CEO. Your shareholders require an 8% return.

Your firm has 1,200 engineers who on average each contribute $240,000 to the annual revenue of the company and receive an average annual salary of $120,000.

-What is the current annual revenue of the firm?

-What is the current operating profit of the firm?

The first candidate for the CEO position, Jane Doe, successfully increased the productive output of engineering employees at her last firm by 5%, and is asking for total annual compensation of $3,500,000 and a three year contract.

-What is the Present Cost of Jane Doe’s three year employment contract?

-If Jane Doe increases the output of your firm’s engineers by 5%, what is her contribution to the firm’s operating profit?

-What is the Present Value of Jane Doe’s three year contribution to operating profits?

-What is the Net Present Value of hiring Jane Doe?

The second candidate for the CEO position is a bit of a technology superstar, Alan Musk, and at his last company inspired and increased productive output of engineering employees by 12%, but is asking for total annual compensation of $21,000,000.

-What is the Present Cost of the Alan Musk’s three year contract?

-If Alan Musk increases the output of your firm’s engineers by 12%, what is his contribution to the firm’s operating profit?

-What is the Present Value of Alan Musk’s three year contribution to operating profits?

-What is the Net Present Value of hiring Alan Musk?

-Which CEO should you hire? Defend your answer.

-Describe in your own words both aspects of the role of the financial manager.

-What is the name of the conflict that exists between shareholders and the CEO?

-What steps can you take as the chairman of the board of directors to lessen this conflict?

-What would be the ratio of the salary of the CEO to the salary of the average engineer if you hire Jane Doe? And for Alan Musk?

-Social media influencers are starting to criticize the ratio between the salary of the CEO and your average engineer. What do you say to them?

Answer 1

You have asked questions after questions, in a single post. I have addressed the first four / five of hem. Please post the balance questions in a lot of 4, separately.

You are the chairman of the board of directors for an innovative technology company, and you are looking to hire a new CEO. Your shareholders require an 8% return.
Your firm has 1,200 engineers who on average each contribute $240,000 to the annual revenue of the company and receive an average annual salary of $120,000.

-What is the current annual revenue of the firm?

Current annual revenue = 1,200 x 240,000 = $  288,000,000

-What is the current operating profit of the firm?

Current operating profit = $  288,000,000 - 1,200 x 120,000 = $  144,000,000

The first candidate for the CEO position, Jane Doe, successfully increased the productive output of engineering employees at her last firm by 5%, and is asking for total annual compensation of $3,500,000 and a three year contract.

-What is the Present Cost of Jane Doe’s three year employment contract?

Present cost = 3,500,000 / (1 + 8%) + 3,500,000 / (1 + 8%)² + 3,500,000 / (1 + 8%)³ = $  9,019,839

-If Jane Doe increases the output of your firm’s engineers by 5%, what is her contribution to the firm’s operating profit?

Her contribution to the firm's operating profit = 5% x Annual revenue = 5% x  288,000,000 = $  14,400,000

-What is the Present Value of Jane Doe’s three year contribution to operating profits?

Present value of contribution = 14,400,000 / (1 + 8%) + 14,400,000 / (1 + 8%)² + 14,400,000 / (1 + 8%)³ = $   37,110,197

-What is the Net Present Value of hiring Jane Doe?

NPV = $  37,110,197 - $ 9,019,839 = $  28,090,357