Complete Chapter 4 Closing Case on page 131 and submit answers to your instructor.
Ben Bates graduated from college six years ago with a finance undergraduate degree. Since graduation, he has been employed in the finance department at East Coast Yachts. Although he is satisfied with this current job, his goal is to become an investment banker. He feelsthat an MBA degree would allow him to achieve this goal. Afterexamining schools, he has narrowed his choice to either WiltonUniversity or Mount Perry College. Although internships are encouragedby both schools, to get class credit for the internship, no salary canbe paid. Other than internships, neither school will allow itsstudents to work while enrolled in its MBA program.
Ben’s annual salary at East Coast Yachts is $50,000 per year, and hissalary is 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 hiscurrent average tax rate is 26 percent. Ben has a savings accountwith enough money to cover the entire cost of his MBA program.The Ritter College of Business at Wilton University is one of the topMBA programs in the country. The MBA degree requires two years offull-time enrollment at the university. The annual tuition is $65,000,payable at the beginning of each school year. Books and other suppliesare estimated to cost $2,500 per year. Ben expects that aftergraduation from Wilton, he will receive a job offer for about $90,000per year, with a $15,000 signing bonus. The salary at this job willincrease at 4 percent per year. Because of the higher salary, his
average income tax rate will increase to 31 percent.The Bradley School of Business at Mount Perry College began its MBAprogram 16 years ago. The Bradley School is smaller and less wellknown than the Ritter College. Bradley offers an accelerated, one-yearprogram, with a tuition cost of $75,000 to be paid upon matriculation.Books and other sup- plies for the program are expected to cost$3,500. Ben thinks that after graduation from Mount Perry, he willreceive an offer of $78,000 per year, with a $12,000 signing bonus.The salary at this job will increase at 3.5 percent per year. Hisaverage income tax rate at this level of income will be 29 percent.Both schools offer a health insurance plan that will cost $3,000 peryear, payable at the beginning of the year. Ben also estimates thatroom and board expenses will cost $2,000 more per year at both schoolsthan his current expenses, payable at the beginning of each year. Theappropriate discount rate is 6.5 percent. Assume all salaries are paidat the end of each year.
1. How does Ben’s age affect his decision to get an MBA?
2. What other, perhaps no quantifiable factors, affect Bens decisionto get an MBA?
3. Assuming all salaries are paid at the end of each year, what is thebest option for Ben from a strictly financial standpoint?
4. In choosing between the two schools, Ben believes that theappropriate analysis is to calculate the future value of each option.How would you evaluate this statement?
5. What initial salary would Ben need to receive to make himindifferent between attending Wilton University and staying in hiscurrent position? Assume his tax rate after graduating from WiltonUniversity will be 31 percent regardless of his income level.
6. Suppose that instead of being able to pay cash for his MBA, Benmust borrow the money. The rent borrowing rate is 5.4 percent. Howwould this affect his decision to get an MBA?
Ross, S., & Westerfield, R., Jaffe, J., & Jordan, B. (2011). Corporatefinance: Core principles and applications (3rd ed.). Boston, MD :McGraw-Hill Irwin.
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