In your job negotiations with a prospective employer (Bickford and Sons Inc.), you are asking for a
$125,000 annual salary, but the owner of the company, Mark, is only willing to pay you $115,000. He
undervalues the fact that you have taken COMM 452. You remembered that perhaps a tuition
reimbursement for an MBA degree could bridge the gap. You countered with two offers: (1) annual
salary of $115,000 or (2) a lower annual salary plus tuition reimbursement. The tuition reimbursement
is deductible to the employer and is a non-taxable benefit to the employee. The government allows the
student a 16% tuition tax credit on the tuition fee provided that the tuition is not reimbursed by the
employer. The corporate tax rate is 28% and the employee’s marginal tax rate is 35%.
(A) Determine the salary and tuition reimbursement in offer (2) so that you are indifferent between
receiving the $125,000 annual salary or offer (2). In doing, so you have to ensure that Bickford is
indifferent from an after-tax perspective between the two offers. Please provide details of your
calculations. If the amounts cannot be determined, please provide an explanation.
(B) Assuming that the tuition reimbursement is $20,000. Compute the annual salary for offer (2) so
that Bickford is indifferent between offer (1) and offer (2). If the salary for offer (2) cannot be
determined, please provide an explanation.
(C) What complexities (if any) would be introduced if the tuition reimbursement by the employer is
not deductible by the employer?
(D) Bickford also offers the employee a choice of a signing bonus of $10,000 or 800 stock options to
be issued “at the money.”
a. Compute the minimum increase in the share price of Bickford to make the employee
indifferent between taking the stock options and taking the signing bonus. (For simplicity,
ignore time value of money and brokering fees)
b. Would you more likely or less likely to choose the stock options if the stock price is $100 as
opposed to the stock price being $10 at the time of grant. Why?
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