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A business executive is offered a management job at Generous Electri

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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.
Solution
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

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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 rece ...
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