Please answer the following question: Lai Labor Law Offices has a client, Michel

Question

Please answer the following question:

Lai Labor Law Offices has a client, Michelle, who is suing her employer for age discrimination. Michelle has been offered & $500,000 settlement which she can collect immediately. Based on 30 years of experience in the area, Lai estimates the following possible outcomes of the case: 50% likelihood Michelle loses and must pay Lai $400,000 in legal fees when the case is over in a year. 30% likelihood that Michelle wins $1,000,000, which would be paid in 2 years. 20% likelihood that Michelle wins $2,000,000, which would be paid in 5 years. (It will take longer because the company will fight harder and appeal more.) If Michelle wins or settles. Lai gets 30% of Michelle's payment. The relevant interest rate is 6%. Present value of $1 at 6% for one year = $0.943, for two years = $0.89, for five years - $0.949. Using EVA, should Lai recommend that Michelle settle or go to court? What other factors besides EVA would you consider?

Explanation / Answer

If Settlement is not agreed, Micehle's EVA is

EVA = 50%*-400000*0.943 + 30%*1000000*0.89 + 20%*2000000*0.949

ie EVA =$458,000

So Lai will get 30%*$458,000 = $137,400 ...(A)

If Michelle Settles, Lai will get 30%*500,000 = $150,000 (B)

As B >A, Lai should not settle & fight the case.

Other factors :

1. Discount rate may go up due to changes in Mkt conditions...affecting the outcome

2. Case may drag longer than 5 yrs which will further reduce EVA & make settlement more attractive.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.