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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 Corporation for $50 a share in cash. His capital gains tax rate would be 15%.
a. If he sells his interest, what will be the value for before-tax profit, taxes and after tax profit?
b. Assume, instead of cash, he accepts Folsom Corporation 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. (assume no cash dividends). What will be the value for before-tax profit, taxes and after tax profit in 2020? His capital gains tax is once again 15%.
c. What is the present value (year 2015) of the after-tax profit computed in b? Use 7% discount rate.
d. Which option should Al select in 2015?
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