Concept explainers
To calculate: The quarterly salary of the player.
Introduction:
The series of payments that are made at equal intervals is an
Answer to Problem 59QP
The quarterly salary of the player is $1,597,735.62.
Explanation of Solution
Given information:
The defensive lineman of the AP Team is in a contract of negotiations. The salary structure of the team is as follows:
- At time zero, the salary is $6,500,000
- At time one, the salary is $5,100,000
- At time two, the salary is $5,600,000
- A time three, the salary is $6,100,000
- At time four, the salary is $7,500,000
- At time five, the salary is $8,200,000
- At time six, the salary is $9,000,000
The payment of the salaries is made in lump sum. The player has requested his agent Person X to negotiate again on the terms. The player needs a bonus of $10 million that must be paid today and the value of the contract rises to $2,000,000. The player also needs an equivalent salary that must be paid every 3 months from the present. The rate of interest is 4.8% that is compounded daily. It is assumed that there are 365 days in a year.
Note: To determine the player’s quarterly salary, it is essential to find the
Formula to calculate the effective annual rate:
Compute the effective annual rate:
Hence, the effective annual rate is 0.4912 or 4.92%.
Formula to calculate the present value:
Note: r denotes the rate of discount and t denotes the number of years. The present value of the current contract is the sum of the cash flows’ present value.
Compute the present value:
Hence, the present value is $41,118,705.53.
As the player wishes to increase the contract value by $2,000,000, then the present value of the contract can be calculated as follows:
Hence, the present value of the new contract is $43,118,705.53.
Note: The player also requested to sign the bonus that is payable at present with the amount of $10 million. To compute the remaining amount, the bonus amount should be subtracted from the new contract’s present value. The remaining amount is the present value of the quarterly payments.
Hence, the remaining amount is $33,118,705.53.
Note: To determine the quarterly payments first, it is essential to understand that the interest rate that is needed is the effective annual rate. The quarterly interest rate can be found by the effective annual rate equation with the daily interest rate. The number of days in a quarter is 91.25 days
Formula to calculate the effective quarterly rate:
Compute the effective annual rate:
Hence, the effective annual rate is 0.01207 or 1.207%.
Now the rate of interest, the
Formula to calculate the present value annuity:
Note: C denotes the payments, r denotes the rate of exchange, and t denotes the period.
Compute the present value annuity:
Hence, the quarterly salary of the player is $1,592,735.62.
Want to see more full solutions like this?
Chapter 6 Solutions
Fundamentals of Corporate Finance
- A famous quarterback just signed a $13.6 million contract providing $3.4 million a year for 4 years. A less famous receiver signed a $14.2 million 4-year contract providing $3 million now and $2.8 million a year for 4 years. The interest rate is 8%. a. What is the PV of the quarterback's contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Present value million b. What is the PV of the receiver's contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Present value millionarrow_forwardProvide working Solutionarrow_forwardh If she expects to earn 8% annually, which is the best choice? - If she expects to earn 9% annually, which option would you recommend? d Explain how interest rates influence the optimal choice. Problem 6 PV OF A CASH FLOW STREAM. A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows: 1 2 3. +- 十 +一 - Contract 1 $3,000,000 $3,000,000 $3,000,000 $3,000,000 Contract 2 $2,000,000 $3,000,000 $4,000,000 $5,000,000 Contract 3 $7,000,000 $1,000,000 $1,000,000 $1,000,000 As his adviser, which contract would you recommend that he accept? Problem 7 EFFECTIVE VERSUS NOMINAL INTEREST RATES. Bank A pays 4% inte Compounded annually on deposits, while Bank B pays 3.5% compounded daily.arrow_forward
- Time Value of Money You have been hired as a financial advisor to Mr Sam. He has received two offers for playing for IPL and wants to select the best offer, based on consideration of money only. What will be your advice? (Hint: Compare the Present Value of each offer by assuming a range of interest, say 8% - 14%) Note: Please show the formula and calculation for the answer selected Offer: Offer A is a $10million offer for $2million a year for 5 years Offer B is a $11million offer of $1million a year for four years and $7million in year 5th Question 1. What is the difference between PV Value (Present Values) of offer A and B at 12%? $0.1 million $0.2 million $0.7 million $0.8 Million Question 2. At 8% interest rate what would be the PV (Present Value) for Offer A $8.1 Million $8.4 Million $8.3 Million $7.9 Million Question 3. At 10% interest rate what would be the PV (Present Value) for Offer B $7.5 Million $8.1 Million $8.9 Million $8.5 Millionarrow_forwardA famous quarterback just signed a $15 MM contract providing $3 MM per year for 5 years. A less famous receiver signed a $13 MM, 5-year contract providing $9.0 MM now and only $800,000 a year for 5 years. If interest rates are 10%, who is better paid on a PV basis and by how much?arrow_forwardmath the present value forw normal work please I can't read tothers Offer I. The buyerin this case was Smythe Manufacturing. They offered Dr. Miller $2 million now plus $100, 000 each year beginning atthe end of year six and continuing through the end of year fifteen. You are Dr. Miller's financial advisor and you feel thatgiven the associated risks to this payment stream, a 10% interest (discount) rate should be used to determine the presentvalue of the offer. Offer II. The buyer in this case was Brouwer Pharmaceutical. They offered 40 percent of their grossprofit on the product for the next four years, with payments beginning at the end of the first year. Brouwer's gross profitmargin was 60%. Sales in year one were projected to be $3 million and are forecasted to grow by 30 percent each yeanthereafter. You are Dr. Miller's financial advisor and you feel that given the associated risks to this payment stream, an8% interest (discount) rate should be used to determine the present value…arrow_forward
- The Perpetual Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $19,500 per year forever. a. If the required return on this investment is 6.1 percent, how much will you pay for the policy? b. Suppose the Perpetual Life Insurance Company told you the policy costs $500,000. At what discount rate would this be a fair deal?arrow_forward2. You have just been offered a contract worth $1.00 million per year for 5 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12.0%. You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV? **round to two decimal places**arrow_forwardProvide Answer with all working Stepsarrow_forward
- Hand written and show your work Question #9 You borrowed S40,000. The terms of the loan was 6% per month and you agreed to payoff in 5 years. What is your monthly payment (annuity)? What are questions or concerns you would have with this contract and deal.arrow_forwardCorrect answerarrow_forwardPlease answer fast I will rate for you sure....arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education