Part 1 (40 Points):

In his senior year at Mizzou, Shawn Carter had been the second runner-up for the fabled Heisman Trophy. The trophy goes to the outstanding football player in America and is presented annually by the New York Athletic Club. During the past football season, Carter had run for over 1,500 yards and scored 18 touchdowns. He had also caught 41 passes coming out of the backfield. His time in running the 40-yard dash, which professional scouts consider to be extremely important, was 4.38 seconds. He was voted first-team All American by the Associated Press and was a second-team All American in the Coaches Poll selections.

On Monday morning, his agent, Carey Jackson, called to say that she was looking at three different proposals that a major West Coast NFL professional football team had made for Shawn's services. The team had drafted him in the first round of the NFL draft as the sixth player selected out of the thousands of college football players that were eligible for that year.

The Edmonton, Alberta, team of the Canadian Football League was also interested in Shawn's services. The Canadian team had called his agent over the weekend to put its offer on the table. While the NFL team that had drafted Shawn in the first round had exclusive rights over all other U.S. teams to signing Shawn during the current year, the Canadian team was not bound by such an arrangement and could make any offer it wished and hope the outcome would be positive.

The West Coast NFL team offered the following three proposals. The teams general manager, who was in charge of contract negotiations, said his team would stand behind any of the three offers and it was up to Shawn and his agent to choose which they preferred.

Contract offer 1:

• $800,000 immediate signing bonus.
• $975,000 at the end of each year for the next five years.

Contract offer 2:

• $300,000 immediate signing bonus.
• $175,000 at the end of each year for the next four years.
• $250,000 a year at the end of years 5 through 10.
• $500,000 a year at the end of years 11 through year 35.

Contract offer 3:

• $400,000 immediate signing bonus.
• $750,000 at the end of year 1.
• $1,200,000 at the end of year 2.
• $1,500,000 at the end of year 3.
• $1,750,000 at the end of year 4.

As part of the third offer, he was also promised a $200,000 bonus at the end of any year in which he was selected to play in the Pro Bowl All-Star game. His agent figured there was a 30 percent probability of that occurring in each of the next four years.

The Edmonton, Alberta, team of the Canadian Football League offered the following:

• $500,000 signing bonus.
• $2,250,000 at the end of each year for the next four years.

The Canadian contract was not guaranteed. This means that Shawn was assured of his signing bonus, but if he did not make the team in any of the three years, he would not receive his salary. His agent figured there was an 80 percent probability that his contract would be picked up (paid) in each of the next four years. (The U.S. team's contract proposals were all guaranteed.)

As a non-business major, Shawn was confused about the process for determining the actual numerical value of the offerings. His agent began to explain to Shawn the importance of the time value of money. She said inflows in the future were not worth nearly as much as current inflows and that, therefore, they should be discounted back to the present at 7 percent interest rate. While Shawn did not fully understand how the calculations were done, he knew he could rely on his agent to do the proper analysis.

Shawn's agent has hired you to compare and contrast these four offers. Please use your Time Value of Money skills to:

First, break down each offer into todays dollars.

Then, rank the offers in the order that you think is most (1) to least (4) favorable to Shawn.

Finally, Justify your rankings, making sure to include any factors you considered in addition to the present value of each offer.

Communicate your recommendation and the basis for that recommendation to your client.

Part 2 (30 Points):

AllBets Corporation is building a $60 million office building in Las Vegas and is financing the construction at a 70 percent loan-to-value ratio, meaning they will make a 30% down payment and finance the remainder of the building. The loan has a fifteen-year maturity, calls for monthly payments, and has a fixed interest rate of 5.5 percent.

Using the above information, create a full amortization table, and then answer the following questions for your client:

1) What is the monthly payment?

2) How much of the first payment goes toward interest?

3) How much of the first payment goes toward principal?

4) How much will AllBets Corporation owe on this loan after making monthly payments for three years (the amount owed immediately after the thirty-sixth payment)?

5) If AllBets can add $3 million to its 25th payment, should they? Why or why not?

6) How much will they pay in total?

7) How much of that total will go toward interest?

8) How much of that total will go toward principal?

Part 3 (30 Points):

Kayla just launched a business named Kayla's Kayaks. The bank has asked her for a Cash Budget for the first quarter, but she has no idea how to do this. Knowing that you are currently rocking it in your Finance class, Kayla has asked for your help in creating this Cash Budget. She gave you the following information based on actual and forecasted sales.

November Sales: $15,000

December Sales: $20,000

January Sales: $15,000

February Sales: $25,000

March Sales: $30,000

April Sales: $45,000

Kayla's sales are 50% cash and 50% on credit. Of the credit sales, 50% are collected during the month after the sale and the remainder is collected two months after the sale.

Kayla's materials (kayaks and kayak gear) cost 60% of sales. She purchases enough materials each month to cover next month's sales. Her materials are paid for in the month after they are purchased.

Kayla's labor costs are 10% of sales, her overhead costs are $3,000 per month, and her selling and administrative expenses are 7% of sales. These are all paid during the month of the sale.

She will need to pay taxes of $7,000 in January and she needs to make a capital purchase of $15,000 in March.

Her January starting cash balance is $30,000, which is also her desired minimum cash balance. She has a line of credit at the bank and can borrow from it as necessary to meet her minimum cash balance goal. Ignore interest.

Create a first-quarter cash budget for Kayla's Kayaks. This budget should cover January, February, and March. Additionally, please show Kayla how much she will have borrowed as of the end of March due to forecasted cash shortfalls during the first quarter.

If you are stuck -- the Harry's Carryout problem should be a very, very good resource for you as you create your budget.