Author Question: Your new employer makes you an unusual salary offer. Choice A is to receive a 20,000 lump sum today ... (Read 32 times)

pepyto · **on:** Jul 11, 2018

Your new employer makes you an unusual salary offer. Choice A is to receive a 20,000 lump sum today and another 50,000 in one year. Choice B is to receive nothing today, and 80,000 in one year.

You carefully consider what you have learned in your finance class and determine that the risk and uncertainty of this offer as well as the difficulty of having to find money for living expenses for one more year leads you to conclude that the appropriate interest rate at which to evaluate these offers is 40. Based strictly on the results of your calculations, which offer should you accept and why?
A) Choice A because the present value of 57,142.86 is greater than the PV of 55,714.29 for Choice B.
B) Choice A because the present value of 70,000 is greater than the PV of 57,142.86 for Choice B.
C) Choice B because the present value of 80,000 is greater than the PV of 70,000 for Choice A.
D) Choice B because the present value of 57,142.86 is greater than the PV of 55,714.29 for Choice A.

Question 2

Larger firms and those with better credit ratings tend to also have less strict capital structure targets.

Indicate whether the statement is true or false

mtmmmmmk · **Reply #1 on:** Jul 11, 2018

Answer to Question 1

D
Explanation: D) PV of B = 80,000/((1.40 )1 )) = 57,142.86, PV of A = 50,000/((1.40 )1 )) + 20,000 = 55,714.29.

Answer to Question 2

FALSE