Corporate Finance: Core Principles and Applications (Mcgraw-hill Education Series in Finance, Insurance, and Real Estate)
Corporate Finance: Core Principles and Applications (Mcgraw-hill Education Series in Finance, Insurance, and Real Estate)
5th Edition
ISBN: 9781259289903
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 4, Problem 55QP
Summary Introduction

To determine: The offer’s present value when the rate of discount 9%.

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Explanation of Solution

The computation of current value of salary offer is as follows:

PV =C{[1(r–g)] – [1(r–g)] × [(1 +g)(1 +r)]t}         = $65,000{[1(.09  .032)]  [1(.09  .032)] × [(1 + .032)(1 + .09)]35}       = $955,361.30

The computation of next year’s bonus is as follows:

Next year’s bonus = .10×($65,000)                             = $6,500

The computation of present value of annual bonus is as follows:

PV =C{[1(r–g)] – [1(r–g)] × [(1 +g)(1 +r)]t}         = $6,500{[1(.09  .032)]  [1(.09  .032)] × [(1 + .032)(1 + .09)]35}       = $95,536.13

The computation of total value of offer is as follows:

PV = PV(Salary) + PV(Bonus) + Bonus paid today       = $955,361.30 + 95,536.13 + 12,000       = $1,062,897.43 PV = PV(Salary) + PV(Bonus) + Bonus paid today       = $955,361.30 + 95,536.13 + 12,000       = $1,062,897.43

Hence, the present value of total offer is $1,062,897.43.

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Chapter 4 Solutions

Corporate Finance: Core Principles and Applications (Mcgraw-hill Education Series in Finance, Insurance, and Real Estate)

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