# Al Simpson helped start Excel Systems several years ago. At the time, he purchased 116,000 shares of stock at $1

## Question:

Al Simpson helped start Excel Systems several years ago. At the time, he purchased 116,000 shares of stock at $1 per share. Now 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 after tax 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 $82.50 (the stock pays 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 percent.

c. Using a 9 percent discount rate, calculate the after tax profit. That is, discount back the answer in part b for five years and compare it to the answer in part a.

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**Related Book For**

## Foundations Of Financial Management

**ISBN:** 9781264097623

18th Edition

**Authors:** Stanley Block, Geoffrey Hirt, Bartley Danielsen

**Question Details**

**20**- External Growth through Mergers

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