A Sports Team in an Effort to Solve the Salary

question 22

Multiple Choice

A sports team in an effort to solve the salary cap problem has offered a player a contract of $1 million dollars a year for the next season with the payments growing at 7% per year for the next 25 years. The player believes the discount rate for such payments is 13%. What is the value today of taking this contract?

• A) $12,405,955.40
• B) $16,666,666.67
• C) $884,956.09
• D) $5,824,965.76

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Definitions:

Long Position

The purchase of a security such as a stock or commodity with the expectation that the asset will increase in value.

Futures Contract

A formal contract for purchasing or selling an item at a pre-set price at a future date.

Maturity

The date on which the principal amount of a financial instrument is scheduled to be repaid.

Daily Settlements

The process by which futures contracts are revalued at the end of each trading day based on the closing market prices to reflect gains and losses.