A. One of the top business schools in America that you would like to attend has
ID: 2731578 • Letter: A
Question
A. One of the top business schools in America that you would like to attend has made an interesting offer: if you pay $100,000 in advance (refundable if you drop out), this will cover tuition, fees, books, and room and board for two years at a substantial discount. You will receive a very prestigious MBA, and should be able to find a job paying $75,000 to start. To come up with this amount of money, you need to choose whether or not to sell your 1,100 shares of Apple stock, your 100 corporate bonds (with $1,000 denominations, 12 years to maturity, 4.25% coupon rate, paid annually, and the current yield on similar bonds is 3.9%) or a combination of both. Provide the appropriate data and calculations that you would perform to make this decision. B. What are the advantages and disadvantages of selling a combination of stocks and bonds? Be sure to support your answers. C. Suppose that you choose to sell your stocks, bonds, or a combination of both. What is your choice, and what is your financial reasoning behind this choice? Consider supporting your answer with quantitative data. D. Suppose that you choose to accept the job with an annual starting salary of $45,000 per year. (Statistically, people in this field can anticipate doubling their salary within five years.) The job has good benefits and no relocation is necessary. However, you will not be able to attend your school. What is your financial reasoning behind this choice? Be sure to support your answer with quantitative data. II. Bonus Versus Stock A. The company has offered you a $5,000 bonus, which you may receive after completing 6 months on the job, (your current "required return" is 4%); or you may take another option on your date of hire, of 100 shares of the company’s stock, which has a current stock price of $50 per share. Mathematically, what is the best choice? Why? (For this, please disregard the tax implications) B. What are the advantages and disadvantages of each option? Be sure to support your answers. C. What would you ultimately choose to do? What is your financial reasoning behind this choice? Consider supporting your answer with quantitative data. III. Compliance A. While investigating the shares offered to you by your potential boss, you discover that the company you are considering working for is being questioned by the SEC regarding some errors in a registration statement as required under the Securities Act of 1933. How does this influence you as a potential employee and as a potential shareholder? Be sure to reference any applicable statutes or laws. B. You know that accepting this job may eventually lead to a promotion into the role of the financial manager. As the potential financial manager, what federal and shareholder requirements would you need to be familiar with in order to ensure that you are being completely compliant?
Explanation / Answer
A. You need to pay an advance of $100,000 in tution fees. If you sell your stocks 1,100 share at $100 today, you would get 110,000 which would be sufficient to pay your fees.
If you sell the bonds whose current price is calculated by =pv(rate,nper,pmt,pv) =pv(0.039,12,42.5,1000) = 1,033.04
Hence the price obtained by selling these bonds would be 100* 1033.04 = 103,304 which is again sufficient to pay the fees.
B: Advantages and disadvanatges of a selling a combination of stocks and bonds
Advanatges: Selling both gives you an advantage of un upside return on both and helps you diversify. If the bond yields go up in the near term, it would be beneficial to have both. Similarly if the price of apple stock is undervalued, it would provide potential positive returns and hence you could gain the advantage of both sides.
Disadvantages: Selling a combination of both involves potential income tax issues and the same will be a problem to maintain both accounts
C:I would choose to sell the bonds currently and pay off my fees and invest th remaining small ampount back into apple shares. Since bonds are for short-term investments, I would sell the bonds rather than apple shares. Equity stocks have cash flows assocaited and hence have a potential to provide better return than bonds over the long term.
D: Joining School: Cash flows are and the NPV is :
Joining Job: Cash flows are and the NPV is :
Since the NPV is higer in accepting a job, I would accept the Job rather than joining school
Note: We have answered 4 sub-parts. Kindly repost remaininh seperately for experts to answer.
Joining School Year Cash flows 1 -100000 2 0 3 75000 4 75000 5 75000 NPV at 5% $ 94,517.72