Al Simpson helped start Excel Systems in 2010. At the time, he purchased 120,000

Question

Al Simpson helped start Excel Systems in 2010. At the time, he purchased 120,000 shares of stock at $1 per share. In 2015, he has the opportunity to sell his interest in the company to Folsom Corp. for $40 a share in cash. His capital gains tax rate would be 10 percent.

(I got the answer to a in bold) a. If he sells his interest, what will be the value for before-tax profit, taxes, and aftertax profit? (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

Value Before-tax profit $4680000 Capital gains taxes $468000 Aftertax profit $4212000

b. Assume, instead of cash, he accepts Folsom Corp. stock valued at $40 per share. He pays no tax at that time. He holds the stock for five years and then sells it for $81.50 (the stock pays no cash dividends). What will be the value for before-tax profit, taxes, and aftertax profit in 2020? His capital gains tax is once again 10 percent. (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

Value Before-tax profit $

Capital gains taxes $

Aftertax profit $

c. What is the present value (Year 2015) of the aftertax profit computed in Requirement b? Use a 9 percent discount rate. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.) Aftertax profit $

Explanation / Answer

b. Before tax profit = 120000 * (81.50 - 1) = $9,660,000
Capital gains tax = 9660000 * 0.1 = $966,000
After tax profit = $8,694,000

c. The aftertax profit computed above is 5 years from now (2015).
Thus, PV of after tax profit = 8,694,000 * 1.09^-5 = $5,650,503.47

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