A business executive is offered a management job at Generous Electric Company, w

Question

A business executive is offered a management job at Generous Electric Company, which offers him a 5 year contract that calls for a salary of $62,000 per year, plus 600 shares of GE stock at the end of the 5 years. This executive is currently employed by Fearless Bus Company, which also has offered him a 5 year contract. It calls for a salary of $65,000, plus 100 shares of Fearless stock each year. The Fearless stock is currently worth $60 per share and pays an annual dividend of $2 per share. Assume end of year payments of salary and stock. Stock dividends begin on year after the stock is received. The executive believes that the value of the stock and the dividend will remain constant. If the executive considers 9% a suitable rate of return in this situation, what must the Generous Electric stock be worth per share to make the two offers equally attractive? Use the future worth analysis method in your comparison

Explanation / Answer

Salary Offer Fearless Bus Co Details Year 1 Year 2 Year 3 Year 4 Year 5 Salary             65,000         65,000 65,000      65,000        65,000 Share value for 100 shares @60               6,000           6,000      6,000         6,000          6,000 Dividend Receivable @2/share               200         400 600              800 Total Receipts             71,000         71,200 71,400      71,600        71,800 Compounding Years                       4                   3              2                 1                 -   Compounding factor @9%               1.412           1.295      1.188         1.090          1.000 Future value of Receipts          100,222         92,206 84,830      78,044        71,800 Future worth of Receipts          427,103 Salary Offer Generous Electric Co Details Year 1 Year 2 Year 3 Year 4 Year 5 Salary             62,000         62,000 62,000      62,000        62,000 Total Receipts             62,000         62,000 62,000      62,000        62,000 Compounding Years                       4                   3              2                 1                 -   Compounding factor @9%               1.412           1.295      1.188         1.090          1.000 Future value of Receipts             87,518         80,292 73,662      67,580        62,000 Future worth of Receipts          371,052 Difference with Fearless receipts future worth             56,051 So share value of 600 Generous Electric shares=             56,051 Value per share $           93.42 So to make both the salaries equally attractive, Generous Electric share must be worth $ 93.42 each.

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