Dr. Payne helped start Surgical Inc. in 1996. At the time, he purchased 200,000 shares of stock at one dollar per share. In 2012, 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.
a. If he sells his interest, what will be the value for before-tax profit, taxes, and aftertax profit? No capital gain exemptions have been used.
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 aftertax profit?
c. Using an 11 percent discount rate, compare the aftertax profit figure in part b to part a.