Managerial Finance MBA (Master of Business Administration) Essay

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Managerial Finance

MBA (Master of Business Administration) is generally regarded as a ticket of financial success and individuals who graduate from one of the top ranking universities are always being paid the six figure salaries. Based on the high salary ticket that MBA offers, a Master of Business Administration is generally being considered as a very valuable degree especially when the degree is being offered by the top ranking universities in the United States. In the United States, MBA graduates often receive twice of the salaries of pre-MBA graduates from the same university. With high value that MBA offers within the labor market, employers often offer incredible income for MBA graduates in the United States.

However, when analyzing the value of an MBA, it is critical to analyze the starting salary of an MBA graduate, which is just part of the methods to value an MBA degree. More importantly, the value added of an MBA is carried out by estimating the differential between pre-MBA degree salary and the post-MBA degree salary. This valuation system is similar to the incremental cash follow being carried out in the capital budgeting. For example, a company decision to buy a new machine will depend on the addition cash flow that a new machine will generate over the old machine. Using the capital budgeting analysis to estimate the value of an MBA program, the initial capital investment will be the forgone income and salary increase that an MBA student will forgo. Part of the initial capital investment is also the tuition fees that an MBA student will need to pay to earn MBA degree. In the United States, MBA tuitions range from $8,500 per year to over $100,000 per annum. While the private universities charge the same tuition fees for residents and non-residents within the state and the public universities implement the discrimination practice. Typically, the public universities charge lesser tuition for students resident within the state and offer higher fee for non-residents. (Lawrence. & Chad 2011). The tuition differential carried out by the public universities varies across the states. At University of Virginia, non-resident MBA students only pay 12% higher than the tuition that state residents pay. However, Georgia Tech (Georgia Institute of Technology) demonstrates the extreme tuition difference between residents and non-residents. Non-residents pay 300% higher tuition fess than Georgia residents to obtain the same degree.

Fundamental objective of this paper is to carry out the estimation value of the MBA degree.

Valuation Technique for MBA

Valuation models generally used to estimate the value of financial assets are also applicable to the real assets. Within the financial circle, analysts use the valuation model to calculate the value of real assets and similar to the financial assets, the value of real assets could be determined from the real cash flow generated, and the higher the growth of the cash flow, the higher the value of the real assets. The lower the risk associated with the real assets the higher the value of the assets. (Fama, & Schwert, 1977). While there are different options to value the real asset, however DCF (Discount Cash Flow) valuation is the most valuation techniques implemented in the real world. Discounted Cash Flow is the method of valuing a real asset using the concept of time value for money. The future cash flows are discounted and estimated to give out the present value (PVs) of an investment. (Lawrence & Chad 2011).

The study uses the cash flow technique to estimate the value of MBA. To carry out the financial investment analysis, the incremental cash flow is often compared to the cash outflows, which is used to derive the internal rate of returns. This technique is used to estimate the value of MBA where the average returns of MBA is compared with the investment of tuition and fees that students incur to obtain an MBA certificates. The study also adds the foregone salary and additional earning potentials that students have to forego before obtaining the MBA degrees. Typically, the project costs represent the income that an individual needs to forgo by leaving the present job to obtain the MBA degree.

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The study collects data from BusinessWeek (2008) that ranks top 30 MBA universities in the United States. The data is used to estimate their tuition and fees, and the pre-MBA salaries and post-MBA salaries are compared to estimate the value of MBA program. The study does not consider the living expenses in the estimate the value of the MBA. The cost of living of students is not included since the living expenses depend on the students' standard of living and tastes. More importantly, the living expenses depend on the location of the universities. Typically, it will be impossible to live cheaply within the high cost areas. Since the study does not know the standard of living of students, the study does not include the cost of living within the value estimation of MBA.

The study determines the incremental cash flow to determine value of MBA. The study estimates the difference between the income of pre-MBA and post-MBA. It is essential to realize students earning approximately $80,000 before entering the MBA program and earn the same $80,000 after earning MBA program is believed to derive no benefits from the MBA certificates. Taking into consideration all the investment students incurred before obtaining the MBA program, the MBA provides negative benefits by earning the same salary at pre-MBA and post-MBA. Moreover, the annual 4% salary increase at post-MBA is considered too low considering the investment incurred to obtain MBA. The 4% of $80,000 is estimated to be $3,200, which implies that students will be earning $3,200 after obtaining the MBA program. It is generally assumed that once an individual obtain an MBA degree, there will be an increase in the salary earned. The study determines the cash inflow, which will be the median salary difference between pre-MBA and post-MBA.

For example, if the pre-MBA salary earned $45,000 and post MBA salary is $90,000, then the difference will be as follows:

Median salary difference = $90,000 - $45,000(1 + 2%) 2

Median salary difference=$40,920

Thus, the median salary difference within the first year after graduation from MBA is $40,920.

On the other hand, the incremental salary increase within the second year after MBA graduation will be as follows:

Incremental Salary Increase= [= $90,000(1 + X %) 1 - $45,000(1 + 2%) 3],

Incremental Salary Increase=$42,556.80

Results of the Estimation of Value of MBA

Based on the estimation of the value of the MBA carried out, it is revealed that MBA program has substantial value. The data in the Table 1 reveals that the MBA tuition for Harvard University is the highest. An MBA student at Harvard University pays $121,220 per annum. Followed by Stanford University and Colombia University that asked students to pay average of $113,820 and $113,180 respectively.

Taking into consideration of the MBA program, the average starting salary for an MBA graduate at Stanford University was $127,189 in 2008. If a student spends average of two years to complete an MBA program, the tuitions for the two-year MBA program will be as follows:

2-Year Tuition = $113,820 x2

2-Year Tuition =$227,820

Estimation of salary forgone for two years in 2008 is as follows:

$55,000 x2=$110,000

Total income forgone to earn MBA is as follows:

$227,820 +110,000

Total Income Forgone=$337,820.

Base on the salary that MBA graduate will earn after graduation, MBA program is very valuable. Typically, Stanford University MBA graduate of 2008 would earn an average of $127,189 per annum. Based on salary that a post-MBA graduate will earn in 2008, it would take an approximately 2 years, 7 months to cover all the tuitions and salary forgone during an MBA study at Stanford University. Within 10 years, a post MBA graduate from Stanford University will earn $1.3 Million.

Table 1: Base Salary at post-MBA in 2008

Rank

School Name

State (Location)

Average GMAT

Resident Tuition and Fees

Average Starting Base Salary

1

Illinois

$109,272

$113,220

2

Massachusetts

NA

$121,220

$121,785

3

Pennsylvania

NA

NA

4

Illinois

$108,000

$111,846

5

California

$113,820

$127,189

6

North Carolina

$104,304

$107,833

7

Michigan

$95,694

$106,502

8

California

$92,832

$114,232

9

New York.....

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