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Al Simpson helped start Excel Systems several years ago. At the time, he purchased 118,000 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 10 percent.

a. If he sells his interest, what will be the value for before-tax profit, taxes, and aftertax profit? (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

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 $83.50 (the stock pays no cash dividends). What will be the value for before-tax profit, taxes, and aftertax profit five years from now? His capital gains tax is once again 10 percent. (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

c. What is the present value (five years) of the aftertax profit computed in Requirement b? Use a 9 percent discount rate. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)

d. Which option should Al select?

multiple choice

• Stock

• Cash

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