Project 2

Your Initial Personal Offering

NOTE: Each group must work completely alone on this project. No across group work of any type is permitted. This includes discussions concerning concepts, Excel, or any other aspect of the project. Treat this assignment as a group take home exam. If you have any questions on how to proceed, feel free to see me. Each member of the group must sign the Southwestern University Honor Code for me to grade your project. You may use the book, notes, other published sources, and the Internet for all parts of this assignment. Do NOT use direct quotes. Always footnote or use the (author,year) format to cite your references. If using the (author, year) format, be sure to include a bibliography.

All sheets must be stabled together in the upper left-hand corner of the page. On the top of the first page indicate whether you are enrolled in the 2:00 - 3:15 section or 3:30 - 4:45 section. Failure to either staple or indicate your section will result in a 5% reduction in your score.

Introduction to the assignment.
As the article This Sure Beats Student Loans! suggests, one possible way to fund current college expenses is to sell the rights to part of your future income. In this project, we are going to estimate how much you could sell the rights to 10% of the future after-tax earnings of your group. Think of this as your Initial Public Offering. You will be writing a business letter to a potential investor explaining what you believe is the value of a bond that has a stream of payments equal to 10% of your group's future after-tax income.

We will need to know something about the path of your earnings. For simplicity, assume you earn no money while attending SU or while in graduate school. Decide what field you want to enter and research the earnings in that field. I do not want to punish those of you with aspirations of advanced study, therefore, even if you are not planning to attend graduate school, I want you to find your stream of income under the assumption that you will. You can pick any program you want; MBA, Public Policy, Ph.D. in Economics, Law, Medicine, etc. Advanced study will often increase your earnings.  Find estimates of earnings for graduates in the field you select.  I doubt that you can learn much about the growth of earnings in various careers. If you are unable to find such data, assume that earnings grow at 4.25% a year regardless of the program. Feel free to have fun with this and explore any career of interest. If nothing else, this should expose you to valuable information regarding your career choice.

Use of a spreadsheet is necessary for this project. Microsoft Excel should be on all lab computers.  I am happy to offer additional help with the spreadsheet part of the assignment, however, please attempt to first work through any problems on your own. The best way to learn how to use Excel is trial and error. If you need assistance, please bring a copy of your spreadsheet with you to office hours or other arranged time. The most difficult part of this assignment is finding the after tax earnings of your group. You will need to use an "if" statement in Excel.

What you need to turn in:

• A business letter explaining the income stream from owning the security and your estimate of the value of your IPO.

 Include:
• What you plan to do right after SU?  (Assume you will work for at least two years before starting graduate school.)
• What graduate program will you enter?
• When will you be in graduate school and for how long?
• What are your expected starting salaries immediately after SU and after graduate work?
• What is the value of your IPO? This value must be based on the theories discussed in class.
• A professional looking, well formatted spreadsheet showing the flow of funds and the value of the bond.
• Use the spreadsheet for ALL calculations.
• Bibliography listing all sources.  Be sure to cite your sources in the text of the letter.
• Spreadsheet formulas.
• You only need to print out the first 4 rows of formulas. To print out the formulas in Excel, save the file under a new name. In the new file add an " ' " in front of the formula in each cell. This tells Excel to treat these cells as text, not as a formula. You should now see the formulas on the spreadsheet. Make sure you adjust the column width and change the cell format to "wrap text" so all the text is visible before you print.

• Everyone retires at age 65.
• Unless you have data showing otherwise, assume the growth rate of wages is 4.25% a year.
• Assuming your expected income streams are correct, find the maximum someone would be willing to pay for the security.
• Do not worry about 1/2 years. For example, if you are a sophomore, assume you will start working in exactly 3 years and will make your first payment to the bondholder in exactly 4 years. Notice that some members of your group may start working before others. In addition, assume you will retire exactly X years from now.
• The market interest rate is 4.5%.
• The following are the marginal tax rates for individual filers. (I've simplified things a bit.) Use these rates in your calculations and assume a $7,000 standard deduction.  Taxable income = earned income - standard deduction.
• Taxable Income 0 - 7,825      Marginal Tax Rate = 10%
• Taxable Income 7,826 - 31,850      Marginal Tax Rate = 15%
• Taxable Income 31,851 - 77,100      Marginal Tax Rate = 25%
• Taxable Income over 77,100      Marginal Tax Rate = 35%