Consider the following scenario and answer the questions that follow:

Nabih is a Lebanese young man graduated from the American University of Beirut (AUB) six

years ago with accounting and finance undergraduate degree. With his current job as a senior

officer cards & acquiring operations in the operations department at Arab Investment Company

(AIC) in Qatar, he is happy and satisfied. However, he has a dream, and his dream to become

a banker at the Qatar National Bank (QNB), one of the top banks in Doha, Qatar. He feels that

an MSc (master of science) in finance would enrich his knowledge in the field and allow him

to achieve this goal. After examining different universities, he has narrowed down his choice

to either University of Delaware in The US or Toulouse Business School in France. Both

schools do not allow its students to work while enrolled in its MSc programme, but may

consider work experience as part of the application process.

Nabih annual salary at the company is $75,000 and this is expected to increase at 3 per cent per

year until retirement. He is currently 28 years old and expects to work for 35 more years. His

current job at the AIC includes a fully paid health insurance plan, and his current average tax

rate is 50 per cent. Nabih has a savings account with enough money to cover the entire cost of

his MSc programme.

The Business School at University of Delaware is one of the top MSc programmes in the US.

The MSc degree requires two years of full-time enrolment at the university. The annual tuition

cost is $60,000, payable at the beginning of each school year. Books and other supplies are

estimated to cost $2,500 per year. Nabih expects that, after graduation from University of

Delaware, he will receive a job offer for about $125,000 per year, with a $25,000 signing bonus.

The salary at this job will increase at 4 per cent per year. Because he will be working in the

US, his average income tax rate will also be at 50 per cent.

The Toulouse Business School began its MSc programme 16 years ago. It is smaller and less

well known than the University of Delaware, however the school offers an accelerated one-

year programme, with a tuition cost of $75,000 to be paid upon matriculation. Books and other

supplies for the programme are expected to cost $3,500. Nabih thinks that he will receive an

offer of $92,000 per year upon graduation, with a $10,000 signing bonus. The salary at this job

will increase at 3.5 per cent per year. Because he will be working in France, Nabih's average

tax rate at this level of income will be 41 per cent.

Both schools offer a discounted health insurance plan that will cost $3,000 per year, payable at

the beginning of the year. Nabih also estimates accommodation, and life expenses including

stipend will cost $20,000 per year at either school.

Questions:

Why does Nabih wants to pursue an MSc degree?

2. How does Nabih's age affect his decision to get an MSc?

3. What factors (measurable or non-measurable) could affect Nabih's decision to get an

MSc?

4. If Nabih receives all his income at the end of each year, how many options does he

have? What would be the best option for him from a financial management point of

view?

5. Nabih believes that the appropriate analysis is to calculate the future value of each

option. How would you evaluate this statement, comment?

6.

What initial salary would Nabih need to receive to make him indifferent between

attending University of Delaware and staying in his current position?

7. Suppose, instead of being able to pay cash for his MSc, Nabih must borrow the

money. The current borrowing rate is 5.4 per cent. How would this affect his

decision?

Assumptions/hints:

I. The appropriate discount rate is 6.5 per cent.

II. Assume tax rate in Oatar and the US are identical.

III. Consider income after tax unless you want the salary before tax for comparision.

IV. Consider costs and benefits together.

V. Salary can be seen as an annuity with a growth rate or growing annuity (last formula

from chapter 4). PV = C [1/(r-g)] - [1/(r- g)] [(1 + g)/(1 + r)]'