What will be the value for before-tax profit

Reference no: EM131792598

Question: Al Simpson helped start Excel Systems in 2005. At the time, he purchased 100,000 shares of stock at $1 per share. In 2010 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?

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 $88.50 (the stock pays no cash dividends). What will be the value for before-tax profit, taxes, and aftertax profit in 2015? His capital gains tax is once again 15 percent.

c. Using a 9 percent discount rate, compare the aftertax profit figure in part b to that in part a (that is, discount back the answer in part b for five years and compare it to the answer in part a ).

Reference no: EM131792598

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