Structuring Scialomies Deal A typical contract negotiation will involve numerous factors, both financial and nonpecuniary Regine and the Orioles have already agreed upon many of the nonpecuniary details about Scialomies contract, leaving just financial aspects to finalize Some players egos dictate that they get the largest nominal value contract, since that is what will make headlines Fortunately, Scialomie has been smart enough to listen to Regine and knows that the nominal value is irrelevant he wants the highest TVM deal Scialomie has also listened to Regine about not squandering his salary Some agents counsel their clients toward seeking deferred compensation, knowing that they need the future financial security Regine feels no such need Still, Scialomie would not mind the additional supplemental income in the future Furthermore, Scialomie wants to play with better players and knows that taking some of his money later will allow the Orioles to shift capital to others on the free agent market Scialomie is a better than average player overall, and hits well for a catcher, but the risk of reinjuring a surgically repaired throwing arm reduces his market value The average annual salary for a catcher is around $2 24m, though Regine argues that Scialomies strong hitting should allow him to make closer to the league average across all positions of $4 5m (Sportrac, 2017) With that range in mind, the Orioles prepared four possible contract offers that would work with their strategic plans and other salary commitments (see Table 2) All offers are for five years of playing with the team Table 2 Contract Offers from the Orioles (All Dollar Figures are in Millions) Offer Signing bonus (paid at t 0 ) Playing salary per year (t 1 t 5 ) Deferred compensation Total nominal value Average salary reported in media 1 $2 75 $2 75 None $16 5 $3 3 2 None $1 5 $3 annually, for 5 years, starting in year 8 (t 8 t 12 ) $22 5 $4 5 3 None $1 5 A 10 year growing annuity that starts with $1 in year 9 (t 9 t 18 ) and grows at 10 per year $23 4 $4 7 4 None $1 1 A lump sum (single payment) of $25 at t 20 $30 5 $6 1 Regine studies the four offers and consults her notes For the purposes of keeping things simple and focusing just on the differences among the deals, she assumes Scialomie receives all payments at the end of each year (e g , the salary for year 1 is received at the end of year one) and she does not consider any tax implications She draws a timeline of payments for each of the contract offers, which is an absolutely necessary step for visualizing the payment timings and making TVM problems easier After realizing how helpful the timeline is in solving even simple TVM problems, she uses her dry erase marker to add Draw a timeline to her bathroom mirror reminders Regine completes her initial TVM calculations using a discount rate of 5 5 , which is the most likely rate based on macroeconomic factors and alternate investments available to Scialomie Her skills as an agent do not include perfect clairvoyance, however, and thus she wants to examine other scenarios in case the rate is higher or lower than she expects She repeats the calculations using rates of 3 0 and 8 0 She closes her laptop once the calculations are complete and puts it in her bag for the morningshe is ready to head to the Oriole front office and settle on Scialomies extension Calculation Questions (Answer these questions on excel Each problem should be answered on a different sheet) 1 What do the timelines look like for each of Scialomies contract offers That is, what is the nominal value of each payment and when is each payment happening

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 15, 2024

Structuring Scialomies Deal A typical contract negotiation will involve numerous factors, both financial and nonpecuniary. Regine and the Orioles have already agreed upon many of

Structuring Scialomies Deal

A typical contract negotiation will involve numerous factors, both financial and nonpecuniary. Regine and the Orioles have already agreed upon many of the nonpecuniary details about Scialomies contract, leaving just financial aspects to finalize. Some players egos dictate that they get the largest nominal value contract, since that is what will make headlines. Fortunately, Scialomie has been smart enough to listen to Regine and knows that the nominal value is irrelevant he wants the highest TVM deal.

Scialomie has also listened to Regine about not squandering his salary. Some agents counsel their clients toward seeking deferred compensation, knowing that they need the future financial security; Regine feels no such need. Still, Scialomie would not mind the additional supplemental income in the future. Furthermore, Scialomie wants to play with better players and knows that taking some of his money later will allow the Orioles to shift capital to others on

the free agent market.

Scialomie is a better than average player overall, and hits well for a catcher, but the risk of reinjuring a surgically repaired throwing arm reduces his market value. The average annual salary for a catcher is around $2.24m, though Regine argues that Scialomies strong hitting should allow him to make closer to the league average [across all positions] of $4.5m (Sportrac, 2017). With that range in mind, the Orioles prepared four possible contract offers that would work with their strategic plans and other salary commitments (see Table 2). All offers are for five years of playing with the team.

Table 2 Contract Offers from the Orioles (All Dollar Figures are in Millions)

Offer	Signing bonus (paid at t₀)	Playing salary per year (t₁-t₅)	Deferred compensation	Total nominal value	Average salary reported in media
#1	$2.75	$2.75	None	$16.5	$3.3
#2	None	$1.5	$3 annually, for 5 years, starting in year 8 (t₈-t₁₂)	$22.5	$4.5
#3	None	$1.5	A 10-year growing annuity that starts with $1 in year 9 (t₉-t₁₈) and grows at 10% per year	$23.4	$4.7
#4	None	$1.1	A lump sum (single payment) of $25 at t₂₀	$30.5	$6.1

Regine studies the four offers and consults her notes. For the purposes of keeping things simple and focusing just on the differences among the deals, she assumes Scialomie receives all payments at the end of each year (e.g., the salary for year 1 is received at the end of year one) and she does not consider any tax implications. She draws a timeline of payments for each of the contract offers, which is an absolutely necessary step for visualizing the payment timings and making TVM problems easier. After realizing how helpful the timeline is in solving even simple TVM problems, she uses her dry erase marker to add Draw a timeline! to her bathroom mirror reminders.

Regine completes her initial TVM calculations using a discount rate of 5.5%, which is the most likely rate based on macroeconomic factors and alternate investments available to Scialomie. Her skills as an agent do not include perfect clairvoyance, however, and thus she wants to examine other scenarios in case the rate is higher or lower than she expects.

She repeats the calculations using rates of 3.0% and 8.0%. She closes her laptop once the calculations are complete and puts it in her bag for the morningshe is ready to head to the Oriole front office and settle on Scialomies extension.

Calculation Questions

(Answer these questions on excel. Each problem should be answered on a different sheet)

1. What do the timelines look like for each of Scialomies contract offers? That is, what is the nominal value of each payment and when is each payment happening?