Assume that the GPA of MBA students at Boston University is normally distributed with µ = 3.3 and σ = .2. If we sample 16 of the MBA students what is the probability that the average GPA will exceed 3.36?

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The MBA Decision

Raj Danielson graduated from university six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Assiniboine University or the University of Passy. Both schools encourage internships, but to get class credit for the internship, no salary can be accepted. Other than internships, neither school allows its students to work while enrolled in its MBA program.
Raj currently works at the money management firm of Prash and Sid. His annual salary at the firm is $63,000 and his salary is expected to increase at 5 percent per year until retirement. He is currently 28 years old and expects to work for 38 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 24 percent. Raj has a savings account with enough money to cover the entire cost of his MBA program.

The Sentinel School of Business at Assiniboine University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $65,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $4,500 per year. Raj expects that after graduation from Assiniboine, he will receive a job offer for about $88,000 per year, with a $14,000 signing bonus. The salary at this job will increase at 5.5 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent.
The Pond School of Business at the University of Passy began its MBA program 16 years ago. The Pond School is smaller and less well known than the Sentinel School. It offers an accelerated one-year program, with a tuition cost of $90,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,000. Raj thinks that he will receive an offer of $85,000 per year upon graduation, with a
$9,000 signing bonus. The salary at this job will increase at 3.7 percent per year. His average tax rate at this level of income will be 31 percent.
Both schools offer a health insurance plan that will cost $2,500 per year, payable at the beginning of the year. Raj also estimates that room and board expenses will cost
$20,000 per year at both schools. The appropriate discount rate is 6.5 percent.
You are required to:

1.   (1%) How does Raj’s age affect his decision to get an MBA?
2.   (1%) What other, perhaps non-quantifiable, factors affect Raj’s decision to get an MBA?
3.   (4%) Assuming all salaries are paid at the end of each year, what is the best option for Raj from a strictly financial standpoint? Show your assumptions, calculations and explain why one of the option is better than the other alternatives.
There are three options to compare: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA. Compare the options using after-tax cash flows. Hint: room and board costs are irrelevant since presumably they will be the same whether he attends college or keeps his current job. Take in account the opportunity costs: lost salary during the MBA.
4.   (2%) What initial salary would Raj need to receive to make him indifferent between attending Assiniboine University and staying in his current position?
Since the first salary payment will not be received for three years, you need to compound this value two years into the future to arrive at the salary amount after graduation.
5.   (1%) Suppose, instead of being able to pay cash for his MBA, Raj must borrow the money. Explain how would this affect his decision?

Mackenzie Dell graduated from university six years ago with an undergraduate degree in finance. Although she is satisfied with her current job, her goal is to become aninvestment banker. She feels that an MBA degree would allow her to achieve her goal. After examining schools, she has narrowed her choice to either Maple Leaf University or Stars and Stripes University. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Mackenzie currently works at the money management firm of Copper Sachs. Her annual salary at the firm is $68,000 per year, expected to increase at 2.5 percent per year until retirement. She is currently 28 years old and expects to work for 35 more years. Her current job includes a fully paid health insurance plan, and her current average tax rate is 26.5 percent. Mackenzie has a savings account with enough money to cover the entire cost of her MBA program. The Faculty of Management at Maple Leaf University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $55,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Mackenzie expects that after graduation from Maple Leaf, she will receive a job offer for about $110,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, her average income tax rate will increase to 30 percent. The School of Business at Stars and Stripes University began its MBA program 16 years ago and is less well known than Maple Leaf University's Faculty of Management. Stars and Stripes University offers an accelerated, one-year program, with a tuition cost of $85,000 to be paid upon graduation. Books and other supplies for the program are expected to cost $4,500. Mackenzie thinks that she will receive an offer of $90,000 per year upon graduation, with an $18,000 signing bonus. The salary at this job will increase at 3.25 percent per year. Her average tax rate at this level of income will be 28.5 percent. Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Mackenzie also estimates that room and board expenses will cost $2,000 more per year at both schools than her current expenses, payable at the beginning of each year. The appropriate discount rate is 6.5 percent. 1. What other, perhaps non-quantifiable, factors affect Mackenzie's decision to get an MBA? 2. Assuming all salaries are paid at the end of each year, which is the best option for Mackenzie—from a strictly financial standpoint. 3. Suppose, instead of being able to pay cash for her MBA, Mackenzie must borrow the money. The current borrowing rate is 4.8 percent. How would this affect her decision? It would be great help if excel exhibits could also be provided.

Ariel Sunnyvale graduated from university six years ago with an undergraduate degree in finance. 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 her goal. After examining schools, she has narrowed her choice to either Northern University or Southern University. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Ariel currently works at the money management firm of Greyson Partners. Her annual salary at the firm is $64,000 per year, expected to increase at 2.75 percent per year until retirement. She is currently 30 years old and expects to work for 37 more years. Her current job includes a fully paid health insurance plan, and her current average tax rate is 25 percent. Ariel has a savings account with enough money to cover the entire cost of her MBA program. The Faculty of Management at Northern University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $50,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Ariel expects that after graduation from Northern, she will receive a job offer for about $88,000 per year, with a $5,000 signing bonus. The salary at this job will increase at 3 percent per year. Because of the higher salary, her average income tax rate will increase to 27 percent. The School of Business at Southern University began its MBA program 16 years ago and is less well known than Northern University's Faculty of Management. Southern University offers an accelerated, one-year program, with a tuition cost of $80,000 to be paid upon graduation. Books and other supplies for the program are expected to cost $4,500. Ariel thinks that she will receive an offer of $100,000 per year upon graduation, with an $15,000 signing bonus. The salary at this job will increase at 3.5 percent per year. Her average tax rate at this level of income will be 28.5 percent. Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ariel also estimates that room and board expenses will cost $2,000 more per year at both schools than her current expenses, payable at the beginning of each year. The appropriate discount rate is 6.5 percent.

1. What other, perhaps non-quantifiable, factors affect Ariel's decision to get an MBA?

2. Assuming all salaries are paid at the end of each year, which is the best option for Ariel—from a strictly financial standpoint.

3. Suppose, instead of being able to pay cash for her MBA, Ariel must borrow the money. The current borrowing rate is 3.75 percent. How would this affect her decision?

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Question: John Ross graduated from college 6 years ago with a finance undergraduate degree. Although he is ...

John Ross graduated from college 6 years ago with a finance undergraduate degree. Although he is satisfied with his current job, his dream is to become an investment banker. To become an investment banker, he would need to take an MBA degree. He is, thus, looking for colleges. After some time, John has narrowed his choice to Brandeis University, Carlton College, or Northeastern University. Both schools allow and encourage internships. However, the Northeastern University will allow students to work while enrolled in a MBA program.

I will describe below the four alternatives that John Ross can evaluate as of today.

Alternative (1)

He can keep his current job at the management firm D&L. His annual salary at the firm is $65,000 per year and is salary is expected to increase at 3% per year until retirement. He is currently 28 years old and he expects to work for 40 more years. His current job includes a full paid health insurance plan and is current average tax rate is 26%. Ben has a savings account with enough money to cover the entire cost of the MBA program.

Alternative (2)

The MBA program at Brandeis University requires two years of full-time enrollment at the university. The annual tuition is $70,000. Books and other supplies are estimated to cost $3,000 per year. John expects that after graduation from Brandeis University he will receive a job offer of $110,000 per year with a signing bonus of $20,000. The expected salary will increase at 4% per year. Because of the higher salary, the average income tax rate will be 31%.

Alternative (3)

The Carlton College offers a one-year program. The tuition cost is $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. John thinks that after the Carlton degree he will be able to receive an offer of $92,000 per year with a $18,000 signing bonus. The salary at this job will increase at 3.5% per year. His average tax rate at this level of income will be 29%.

Alternative (4)

Northeastern University offers a two-years program. The annual tuition is $90.000. Northeastern allows students to work while enrolled in the MBA program. After some research, John has found out that he can potentially work for his marketing professor as research assistant. The annual stipend for this position at Northeastern University is $25,000 for the first year and $27,000 for the second year. Books and other supplies are estimated to cost $2,000 per year. John expects that after graduation from Northeastern University he will receive a job offer of $85,000 per year with a signing bonus of $10,000. The expected salary will increase at 2% per year for the first 10 years. The growth rate will be 4% thereafter. The average income tax rate is 30%.

All schools offer a health insurance plan that will cost $3,000 per year. John also estimates that room and board expenses will cost $2,000 more per year at all schools than his current expenses. The appropriate discount rate is 6.3%.

Determine the NPV for each of the four alternatives. Please provide formula calculations.

Paul Rosenzweig is founder and CEO of? OpenStart, an innovative software company. The company is? all-equity financed, with100 million shares outstanding. The shares are trading at a price of $1.Rosenzweig currently owns 10 million shares. There are two possible states in one year. Either the new version of their software is a?hit, and the company will be worth $150?million, or it will be a? disappointment, in which case the value of the company will drop to $75 million. The current risk free rate is 4.3%.

Rosenzweig is considering taking the company private by repurchasing the rest of the outstanding equity by issuing debt due in one year. Assume the debt is?zero-coupon and will pay its face value in one year.

a. What is the market value of the new debt that must be? issued?

b. Suppose OpenStart had? risk-free debt with a face value of $75 million. What would be the value of its debt and levered equity? today?

c. What fraction of the levered equity in ?(b?) would you need to combine with the? risk-free debt in ?(b?) to raise the amount in left parenthesis Bold a right parenthesis(a)??

d. What are the payoffs of the portfolio in ?(c?)?

What face value of risky debt would have the same? payoffs?

e. What is the yield on the new debt that will be required to take the company? private?

f. If the two outcomes are equally? likely, what is? OpenStart's current WACC? (before the? transaction)???

g. What is? OpenStart's debt and equity cost of capital after the? transaction? Show that the WACC is unchanged by the new leverage.

Raj Danielson graduated from university six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Assiniboine University or the University of Passy. Both schools encourage internships, but to get class credit for the internship, no salary can be accepted. Other than internships, neither school allows its students to work while enrolled in its MBA program.

Raj currently works at the money management firm of Prash and Sid. His annual salary at the firm is $53,000 and his salary is expected to increase at 3% per year until retirement. He is currently 28 years old and expects to work for 38 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26%. Raj has a savings account with enough money to cover the entire cost of his MBA program.

The Sentinel School of Business at Assiniboine University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrolment at the university. The annual tuition is $58,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,000 per year. Raj expects that after graduation from Assiniboine, he will receive a job offer for about $87,000 per year, with a $10,000 signing bonus. The salary at this job will increase at 4% per year. Because of the higher salary, his average income tax rate will increase to 31%.

The Pond School of Business at the University of Passy began its MBA program 16 years ago. The Pond School is smaller and less well known than the Sentinel School. It offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,200. Raj thinks that he will receive an offer of $78,000 per year upon graduation, with a $8,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be 29%.

Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Raj also estimates that room and board expenses will decrease $4,000 per year at both schools. The appropriate discount rate is 6.5%.

QUESTIONS:

1.How does Raj’s age affect his decision to get an MBA?
2. What other, perhaps non-quantifiable, factors affect Raj’s decision to get an MBA?
3. Assuming all salaries are paid at the end of each year, what is the best option for Raj from a strictly financial standpoint?
4. Raj believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
5. What initial salary would Raj need to receive to make him indifferent between attending Assiniboine University and staying in his current position?

6. Suppose, instead of being able to pay cash for his MBA, Raj must borrow the money. The current borrowing rate is 5.4%. How would this affect his decision?

Raj Danielson graduated from university six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Assiniboine University or the University of Passy. Both schools encourage internships, but to get class credit for the internship, no salary can be accepted. Other than internships, neither school allows its students to work while enrolled in its MBA program.

Raj currently works at the money management firm of Prash and Sid. His annual salary at the firm is $53,000 and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 38 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Raj has a savings account with enough money to cover the entire cost of his MBA program.

The Sentinel School of Business at Assiniboine University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrolment at the university. The annual tuition is $58,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,000 per year. Raj expects that after graduation from Assiniboine, he will receive a job offer for about $87,000 per year, with a $10,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent.

The Pond School of Business at the University of Passy began its MBA program 16 years ago. The Pond School is smaller and less well known than the Sentinel School. It offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,200. Raj thinks that he will receive an offer of $78,000 per year upon graduation, with a $8,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be 29 percent.

Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Raj also estimates that room and board expenses will decrease $4,000 per year at both schools. The appropriate discount rate is 6.5 percent.

QUESTIONS:

1.How does Raj’s age affect his decision to get an MBA?
2. What other, perhaps non-quantifiable, factors affect Raj’s decision to get an MBA?
3. Assuming all salaries are paid at the end of each year, what is the best option for Raj from a strictly financial standpoint?
4. Raj believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
5. What initial salary would Raj need to receive to make him indifferent between attending Assiniboine University and staying in his current position?

6. Suppose, instead of being able to pay cash for his MBA, Raj must borrow the money. The current borrowing rate is 5.4%. How would this affect his decision?

Gill Bates graduated from university six years ago with an undergraduate degree in finance. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Canada University or America University. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Gill currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $65,000 per year, expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 40 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Gill has a savings account with enough money to cover the entire cost of his MBA program. The Faculty of Management at Canada University is one of the top MBA programs in the country. 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. Books and other supplies are estimated to cost $3,000 per year. Gill expects that after graduation from Canada, he will receive a job offer for about $110,000 per year, with a $20,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent. The School of Business at America University began its MBA program 16 years ago and is less well known than Canada University's Faculty of Management. America University offers an accelerated, one-year program, with a tuition cost of $85,000 to be paid upon graduation. Books and other supplies for the program are expected to cost $4,500. Gill thinks that he will receive an offer of $92,000 per year upon graduation, with an $18,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be 29 percent. Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Gill also estimates that room and board expenses will cost $2,000 more per year at both schools than his current expenses, payable at the beginning of each year. The appropriate discount rate is 6.5 percent. 1. Assuming all salaries are paid at the end of each year, which is the best option for Gill—from a strictly financial standpoint.

Top Notch Homes Ltd. (TNH) is a privately owned company selling a luxury range of home equipment. Fiona Fielding, the daughter of the company’s founder, took over responsibility for running the company in December 2018. She has little management experience. Her main interest is in developing a new business line to broaden the company’s activities. She has no interest in day-to-day internal control activities preferring instead to adopt a more informal management style. Fiona found a supplier of a new design of hot tub in Norway. She immediately started to import these hot tubs financed by a substantial bank overdraft. The company sells to retailers at £2,000 per unit representing a typical mark-up of 100% on cost. At first sales averaged 50 units per month. Demand was so great that Fiona was forced to engage a second supplier in Finland but at a purchase cost of £1,500 per unit. That supplier required Fiona to sign a three-year contract committing to purchase 400 units per annum. In the last two months of the accounting period ended 31 December 2019, sales of the hot tubs have fallen significantly and the selling price has had to be reduced by 30%. The hot tubs are sold with a three-year warranty. Some of the units bought from Finland have developed faults which cannot be rectified on site. Customers have insisted that the faulty units be replaced or a complete refund given. Fiona is reluctant to tell the auditors exactly how many units have had to be replaced. At the year-end, inventory consisted of 200 saunas. Fiona is adamant that these should be valued at cost. Payments due to the suppliers have been delayed because there have been problems reconciling the invoices payable to suppliers with the deliveries received from them. The supplier in Norway is threatening legal action to enforce payment and the supplier in Finland is insisting on cash upfront before any more deliveries are made.

Outline FIVE substantive audit procedures that the auditors of TNH could undertake and explain the purpose of each