In the current year (year 0), Amisha became a shareholder in Sultan Inc., a calendar year S corporation, by contributing $15,000 cash in exchange for stock. Shortly before the end of the year, Sultan’s CFO notified Amisha that her pro rata share of ordinary loss for the year would be $55,000. Amisha immediately loaned $40,000 to Sultan in exchange for a two-year, interest-bearing corporate note. Consequently, she had enough stock and debt basis to allow her to deduct the $55,000 loss on her current year return. Compute the NPV of Amisha’s cash flow associated with her loan in the following three cases. In each case, assume she has a 35 percent marginal tax rate on ordinary income, a 15 percent rate on capital gains, and uses a 6 percent discount rate.
a. For the next two years (years 1 and 2), Amisha’s share of Sultan’s ordinary income totaled $49,000, and Sultan did not distribute any cash to its shareholders. However, it did repay the $40,000 loan plus $3,800 interest in year 2.
b. For the next two years (years 1 and 2), Amisha’s share of Sultan’s ordinary income totaled $19,100, and Sultan did not distribute any cash to its shareholders. However, it did repay the $40,000 loan plus $3,800 interest in year 2.
c. For the next two years (years 1 and 2), Amisha’s share of Sultan’s ordinary loss totaled $11,400. In year 2, the corporation declared bankruptcy and defaulted on all its debts, including the loan from Amisha.