Ben Bates graduated from college six years ago with a nance undergraduate degree
ID: 2769077 • Letter: B
Question
Ben Bates graduated from college six years ago with a nance undergraduate degree. Although he is satised 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 Wilton University or Mount Perry College. 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.
Ben currently works at the money management rm of Dewey and Louis. His annual salary at the rm is $55,000 per year, 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. Ben has a savings account with enough money to cover the entire cost of his MBA program.
The Ritter College of Business at Wilton 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 $63,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $98,000 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, his average income tax rate will increase to 31 percent.
The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers an accelerated one-year program, with a tuition cost of $80,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Ben thinks that he will receive an offer of $81,000 per year upon graduation, with a $10,000 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. Ben also estimates that room and board expenses will cost $20,000 per year at both schools. The appropriate discount rate is 6.5 percent.
QUESTIONS (Answers must be hand written)
1. How does Ben’s age affect his decision to get an MBA?
2. What other, perhaps non-quantiable, factors affect Ben’s decision to get an MBA?
3. Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly nancial standpoint?
4. Ben 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 Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?
6. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?
Explanation / Answer
Answer:1 Ben graduated 6 years ago, as a Finance Major. The time period he has taken off from education and invested into his career, is a hindrance to his enrollment into MBA program. The long break from education, simply, means lack of concentration and serious attitude towards studies. Moreover, since he is already employed, his career decision will have to be altered. He plans to work for 35 more years. He has to carefully decide whether he needs to enroll into the program or not. If he does, then he would have only 33 more years of work, which is not consistent with his initial plan.
Answer:2 Non-quantifiable, by definition means, not being able to allocate the quantity or determine the quantity.
In case of Ben, there is a list of such factors.
university.
He would have to invest his time, as he is already employed and needs to find time to enroll into full-
time MBA program.
Consider the geographical diversity: he has to consider the location of his preferred university.
Answer:3 Ben expects that after graduating from Wilton, he will receive a job offer for about 95000 per year, with a 15000 signing bonus. The Salary will increase at 4% per year. Because of the higher salary, his average income tax rate will increase to 31%. Similarly, after graduating from Mount Perry, Ben expects that he will receive an offer of 78000$ per year upon graduation, with the 10000$ signing bonus, the salary will increase at 3.5% per year. His average tax rate at this level of income will be 29%. Staying at the current job, will result in his annual income of $50, 000 with a 3% increment on his salary, annually. His average tax rate would be 26%. If he decides to stay, he will continue earning what he is earning at the moment. His net income in 35 years of career will be $750,763.
If he decides to go to Rifter or Bradley, during the period of his enrolment, he will not have income, cash inflow; instead there will be cash outflow from his savings. But after, In case of graduating from Wilton university, his total income will be $113,800 and after deducting the tax rate (31%) his net income at the end of the year will be three lack sixty six thousand nine hundred and ninety six($366996).
In case of Mount Perry College, his total income will be $90730 and after subtracting the tax rate (29%) his net income at end of the year will be three lack twelve thousand seven hundred and sixty two ($312762). By comparing the Net incomes, for Ben the best option, from strictly financial point of view, will be Wilton University. As after graduating from this university he will have superior salary package with high increasing rate and bonus.
Answer:4 The future value evaluation will allow Ben to understand what he stands to make financially and advance his career. Hence, allowing to make a choice of leaving his current salary to acquire the MBA or continue in his present job.
Answer:5 Calculating the Present Value (PV) of $110,000+20,000 (annual salary and signing bonus), Ben must earn at least $94,000 at his present job to stay and not acquire the MBA.
Answer:6 Obtaining a loan for the MBA will affect the expected salary, hence he may choose to obtain a lesser amount of loan, and though he would earn less salary, his repayments would be less too.
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