Ten years ago, Xio and Xandra each invested $300,000 to create Xava Corporation.
ID: 2409416 • Letter: T
Question
Ten years ago, Xio and Xandra each invested $300,000 to create Xava Corporation. Xava develops and manufactures rock climbing and bungee jumping equipment. The business has become very profitable (it now is valued at $3,000,000), and Xandra would like to cash out the profits and sell the business. Xio, however, wants to reinvest the profits and expand the business into ice diving Because they have different expectations, Xio and Xandra agree that the best solution is to divide up the company. Xandra will receive the bungee division; Xio, the rock climbing. After the reorganization, Xandra sells her stock in the bungee division for $1,500,000 at the beginning of the current year. Xio retains her ownership of the rock climbing divisionExplanation / Answer
Solution:
Amount received by Xandra = $1,500,000
amount investedb y Xandra = $300,000
Long term capital gain = $1,500,000 - $300,000 = $1,200,000
Long term capital gain tax = $1,200,000 * 20% = $240,000
Present value of Xandra = $1,500,000 - $240,000 = $1,260,000
Sale value of rock climing stock at the end of 6 years = $2,000,000
Invested amount by Xio = $300,000
Long term capital gain = $2,000,000 - $300,000 = $1,700,000
Long term capital gain tax = $1,700,000 * 20% = $340,000
Net Value received by Xio = $2,000,000 - $340,000 = $1,660,000
Present value for Xio = $1,660,000 * PV Factor at 7% for 6th period
= $1,660,000 * 0.666342
= $1,106,128
As present value of Xandra is higher than present value of Xio, therefore Xandra made the better choice.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.