You have received two job offers. Firm A offers to pay you $80,000 per year for two years. Firm B offers to pay you $95,000 per year for two years. The two jobs are identical except that firm B has a 60% chance of firing you at the end of the first year when the economy is in recession. If firm B fires you at the end of the first year, you expect you could find a new job paying $70,000 per year, but you would be unemployed for 6 months while you search for it. Assume the annual salary is paid in one cash flow at the year end. That is, discount the first-year salary by one year and discount the second year expected salary by two years. Use a discount rate of 10%. a) What is your expected income in year 2 if you take the offer from Firm B? (Hint: you might want to draw a decision tree). Your answer: $ 123456). (Please provide your answers as integers, or, in the format of b) What is the present value of expected income if you take the offer from Firm B? Your answer: $ (Please provide your answers as integers, or, in the format of 123456). c) What is the present value of expected income if you take the offer from Firm A? Your answer: $ (Please provide your answers as integers, or, in the format of 123456). d) Which offer pays you a higher present value of expected wages? ✓ Select alternative They have identical present values. Firm B Firm A steady jobs to attract employees. ic risks (where they tend to go on hiring sprees during economic during recessions) may need to offer Select alternative wages than
You have received two job offers. Firm A offers to pay you $80,000 per year for two years. Firm B offers to pay you $95,000 per year for two years. The two jobs are identical except that firm B has a 60% chance of firing you at the end of the first year when the economy is in recession. If firm B fires you at the end of the first year, you expect you could find a new job paying $70,000 per year, but you would be unemployed for 6 months while you search for it. Assume the annual salary is paid in one cash flow at the year end. That is, discount the first-year salary by one year and discount the second year expected salary by two years. Use a discount rate of 10%. a) What is your expected income in year 2 if you take the offer from Firm B? (Hint: you might want to draw a decision tree). Your answer: $ 123456). (Please provide your answers as integers, or, in the format of b) What is the present value of expected income if you take the offer from Firm B? Your answer: $ (Please provide your answers as integers, or, in the format of 123456). c) What is the present value of expected income if you take the offer from Firm A? Your answer: $ (Please provide your answers as integers, or, in the format of 123456). d) Which offer pays you a higher present value of expected wages? ✓ Select alternative They have identical present values. Firm B Firm A steady jobs to attract employees. ic risks (where they tend to go on hiring sprees during economic during recessions) may need to offer Select alternative wages than
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:You have received two job offers. Firm A offers to pay you $80,000 per year for two years. Firm B offers to pay you
$95,000 per year for two years. The two jobs are identical except that firm B has a 60% chance of firing you at the
end of the first year when the economy is in recession. If firm B fires you at the end of the first year, you expect
you could find a new job paying $70,000 per year, but you would be unemployed for 6 months while you search
for it. Assume the annual salary is paid in one cash flow at the year end. That is, discount the first-year salary by
one year and discount the second year expected salary by two years. Use a discount rate of 10%.
a) What is your expected income in year 2 if you take the offer from Firm B? (Hint: you might want to draw a
decision tree).
Your answer: $
123456).
(Please provide your answers as integers, or, in the format of
b) What is the present value of expected income if you take the offer from Firm B?
Your answer: $
(Please provide your answers as integers, or, in the format of 123456).
c) What is the present value of expected income if you take the offer from Firm A?
Your answer: $
(Please provide your answers as integers, or, in the format of 123456).
d) Which offer pays you a higher present value of expected wages?
✓ Select alternative
They have identical present values.
Firm B
Firm A
steady jobs to attract employees.
ic risks (where they tend to go on hiring sprees during economic
during recessions) may need to offer Select alternative wages than
Transcribed Image Text:You have received two job offers. Firm A offers to pay you $80,000 per year for two years. Firm B offers to pay you
$95,000 per year for two years. The two jobs are identical except that firm B has a 60% chance of firing you at the
end of the first year when the economy is in recession. If firm B fires you at the end of the first year, you expect
you could find a new job paying $70,000 per year, but you would be unemployed for 6 months while you search
for it. Assume the annual salary is paid in one cash flow at the year end. That is, discount the first-year salary by
one year and discount the second year expected salary by two years. Use a discount rate of 10%.
a) What is your expected income in year 2 if you take the offer from Firm B? (Hint: you might want to draw a
decision tree).
Your answer: $
123456).
(Please provide your answers as integers, or, in the format of
b) What is the present value of expected income if you take the offer from Firm B?
Your answer: $
(Please provide your answers as integers, or, in the format of 123456).
c) What is the present value of expected income if you take the offer from Firm A?
Your answer: $
(Please provide your answers as integers, or, in the format of 123456).
d) Which offer pays you a higher present value of expected wages?
Select alternative
e) Firms with higher pro-cyclical economic risks (where they tend to go on hiring sprees during economic
expansions and firing many employees during recessions) may need to offer ✓ Select alternative ages than
steady jobs to attract employees.
the same
lower
higher
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