Jimmy’s Dilemma

Authors: Paul Bentley & Ryan Pennock (Stern ‘20) Firm Style & Round: Deloitte Round 2 Quant: 9
[Interviewee-led] Structure: 9

Case Prompt:
It is early October, and Jimmy Smith, an MBA2 at NYU Stern, has a decision to make. After a summer interning at Firm A, Jimmy
received an offer to return full-time next year. However, Jimmy also decided to re-recruit and received a competing offer from Firm B.
Jimmy now needs to decide which offer he should accept, and has looked to you, his best friend, for help.

Case Overview: Overview Information for Interviewer:

Industry: Recruiting • This case tests the candidate’s ability to weigh the financial implications
associated with two offers of employment.
Case Type: Investment Decision • At a minimum, the candidate should identify that the timing of the
cashflows matter: they will need to discount all cashflows to the present
Concepts Tested: day in order to properly compare the two offers.
• Valuation (DCF) • A good candidate should think beyond the immediate financial
• Structured Math incentives and note that exit opportunities may be important to Jimmy
• Brainstorming (note: exit opportunities are important here).

*Quant indicates how much math is involved and Structure represents the
309 level of difficulty around developing frameworks. 1 = Easiest, 10 = Hardest
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 Jimmy’s Dilemma: Case Guide

Clarifying Information: Interviewer Guide:

• Jimmy only cares about money, and is • A Good Framework Will:
seeking to maximize financial value
o Identify the potential sources of value/compensation at the
• Jimmy is not considering any other competing firms
opportunities o Annual salary
o Growth/raises
• If asked: Jimmy’s intention is to work at o Signing bonus/annual bonus
either firm for 3 years
o Relevant methods to assess value of each offer of employment
• Firms A and B are competitors in the same o Valuation Method (DCF)
industry o Growth

• Firm A is considered second tier, but o Brainstorm Additional Considerations

increasingly competes with top-tier firms for o Exit opportunities
talent o Training
o Firm focus
• Firm B is the more prestigious and is o Firm financial performance
considered top-tier in its industry

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 Jimmy’s Dilemma: Exhibit #1 & #2 Guide

Exhibit #1 & 2:
• The caser should move forward by asking for the compensation packages for each firm. If they don’t, prompt them in that direction.
Give Exhibit 1 & 2. The following exhibits have the actual offers Jimmy has received and some independent research Jimmy has
conducted. Which offer is best?

Notes to Interviewer:

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 Jimmy’s Dilemma: Exhibit #1 & #2 Solution

Solution:

Firm A - NPV Firm B - NPV

Year 0 1 2 3 Year 0 1 2 3

Salary 0 91 114 126 Salary 0 97 121 147

Signing Bonus 30 0 0 0 Signing Bonus 40 0 0 0

Annual Bonus 0 30 30 30 Annual Bonus 0 35 35 35

Tuition Reimbursement 0 0 0 78 Tuition Reimbursement 0 0 0 0

TOTAL 30 121 144 234 TOTAL 40 132 156 182

Simplified DCF 30 110 120 180 Simplified DCF 40 120 130 140

NPV of Firm A Offer 440 NPV of Firm B Offer 430

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 Jimmy’s Dilemma: Brainstorm Guide

Brainstorm:
• After calculating the NPV for each firm’s offer, prompt caser to brainstorm other things Jimmy should consider before accepting. Push
caser to reach 4 ideas (beyond what they may have included in their initial framework). What other things should Jimmy consider
before making a decision? As Jimmy’s friend, you should include additional financial considerations, but also introduce him to some
non-financial factors he needs to think about.

Sample Brainstorm:

Financial Non-financial

Exit opportunities Focus of firm’s business

Firm’s performance / financial security Location

Travel time
Corporate culture

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 Jimmy’s Dilemma: Exhibit #3 Guide

Exhibit #3:
• After brainstorm, lead the conversation towards Exit Opportunities. If caser did not list this, present the idea to him/her. Give Exhibit 3.
What do you make of the following data Jimmy was able to collect on the potential opportunities he could receive when leaving the firm
after 3 years?

Notes to Interviewer:
Step 1
Caser should recognize the need to determine an expected value, this can be done either by:
• Calculating the mean using the given data [Firm A = $185k; Firm B = $220k]
• Using the median based on the chart, so long as the interviewer explains his/her choice (ie. each distribution may be skewed
by tail) [Firm A = $175k; Firm B = $225k]
Firm A Firm B
Weighted Salary Weighted
Salary ($'000s) x Probability = Value ($'000s) x Probability = Value
$150 20% $30.00 $150 0% $0.00
$175 40% $70.00 $175 10% $17.50
$200 25% $50.00 $200 20% $40.00
$225 10% $22.50 $225 50% $112.50
$250 5% $12.50 $250 20% $50.00
Expected Value = $185.00 Expected Value = $220.00

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 Jimmy’s Dilemma: Exhibit #3 Guide cont’d.

Notes to Interviewer:
Step 2

• Candidate should realize that the difference in year 4 earnings is either $35k (mean) or $50k (median), depending on their method of
calculation in Step 1.

• Candidate should then quickly calculate the NPV of that differential in order to see that the exit opportunities result in Firm B
becoming the better option during the fourth year. Note also that the 5% growth rate is a red herring (i.e. it does not change the
outcome) and will only further this disparity.

PV = FV / (1 + r)n
= 35 / (1.4) or = 50 / (1.4)
= 25 = 35.7

• CONCLUSION: we can see that the PV of the expected value of the exit opportunities exceeds the $10k difference
previously established between the two offers. Thus, Firm B becomes the better option.

• NOTE: an excellent candidate may attempt to undertake a more complex NPV calculation—for example, by treating the exit
opportunities as a perpetuity. While this is very thorough, it is unnecessary because the outcome should be clear without it.

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 Jimmy’s Dilemma: Recommendation

Recommendation: Risks: Next Steps:

• Jimmy should choose Firm B • Firm B encounters financial • Leverage offer at Firm A to negotiate
challenges and lays off staff a better deal at Firm B.
• The relative value of the exit
opportunities at Firm B more than • Jimmy underperforms at Firm B and • Conduct further due diligence of
compensate for the higher 3-year does not realize the benefits each firm (including cultural fit, type
value of Firm A associated with its better exit of work, etc.)
opportunities
• Make the most of each firm’s ”sell
• Firm B is a poor cultural fit for Jimmy days” and hold off on signing until
and he leaves before his three years the last minute
are u •

Bonus: Guide to an excellent case

• A good candidate will recognize that the three-year economics of the two firms do not tell the whole story, and that the long-term
economics are crucial, as is the case with many investment opportunities.
• A good candidate will identify the need for DCF and NPV calculations, and will remain structured throughout
• An excellent candidate may introduce additional macro-economic factors to the discussion, presenting potential risks and assessing the
impact these could have on the given projections

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 Exhibit #1: Jimmy’s Dilemma

Compensation Package by Firm

Firm A Firm B

Starting Salary $91k $97k

Signing BonusϮ $30k $40k

Expected Annual Bonus $30k $35k

Tuition Reimbursement* $78k $0

Ϯto be distributed before start of employment

*to be distributed at the end of year 3

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 Exhibit #2: Jimmy’s Dilemma

Note: Annual bonus expected to remain constant

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 Exhibit #3: Jimmy’s Dilemma
Distribution of Expected Starting Salaries for Exit
Opportunities

$250

$225

$200

$175

$150

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

Top-Tier Second-Tier

Note: Assume salary will grow at 5% per year indefinitely

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