Al Simpson helped start Excel Systems in 2010. At the time, he purchased 110,000

Question

Al Simpson helped start Excel Systems in 2010. At the time, he purchased 110,000 shares of stock at $1 per share. In 2015, he has the opportunity to sell his interest in the company to Folsom Corp. for $50 a share in cash. His capital gains tax rate would be 15 percent.

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.)
  

b. Assume, instead of cash, he accepts Folsom Corp. stock valued at $50 per share. He pays no tax at that time. He holds the stock for five years and then sells it for $82.50 (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 15 percent. (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)
  

c. What is the present value (Year 2015) of the aftertax profit computed in Requirement b? Use a 7 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.)
  

A

Aftertx profit

Explanation / Answer

a. cost of the shares = $1*110,000 = $110,000

sold the shares for = $50*110,000= $55,00,000

before tax profit = money received - cost paid = $53,90,000 = capital gains

tax rate = 15%

So, tax = 0.15*53,90,000 = $80,85,00

So, after tax profit = $53,90,000-$8,08,500 =$45,81,500

b. sold for = $82.5 *110,000 = $90,75,000

before tax profit = $90,75,000 - $110,000 = $89,65,000 = capital gains

taxes = 0.15 * 89,65,000 = $13,44,750

So, after tax profit = $89,65,000 - $13,44,750 = $76,20,250

c. 7 % discount rate to discount after tax profit in (b) from 2020 to 2015:

$76,20,250/(1+0.07)^5 = $54,33,132.934

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