Reference no: EM132767944
Questions -
Q1. Dr. Payne helped start Surgical Inc. 15 years ago. At the time, he purchased 200,000 shares of stock at one dollar per share. In 20XX, he has the opportunity to sell his interest in the company to Medical Technology for $40 a share. His marginal tax rate would be 28 percent. Assume a capital gain exemption limit of $500,000 is available.
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 stock valued at $40 per share. He holds the stock for five years and then sells it for $72.50 (the stock pays no cash dividends). What will be the value for before-tax profit, taxes, and after tax profit?
c. Using an 11 percent discount rate, what is the present value of the after-tax profit figure in part b to part a?
Q2. Assume the Arrow Corporation is considering the acquisition of Failure Unlimited. The latter has a $400,000 tax loss carry-forward. Projected earnings for the Arrow Corporation are as follows:
|
|
20XX
|
20XY
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20XZ
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Total
|
|
Before-tax income
|
$160,000
|
$200,000
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$320,000
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$680,000
|
|
Taxes (25%)
|
40,000
|
50,000
|
80,000
|
170,000
|
|
Income available to shareholders
|
$120,000
|
$150,000
|
$240,000
|
$510,000
|
a. How much will the total taxes of Arrow Corporation be reduced as a result of the tax loss carry-forward?