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.