Question

1: You bought Eagles, Inc. for $10 per share 15 years ago. You never sold any shares. Today, it has 100mm shares authorized, 50mm shares issued and 30mm in treasury shares. The market value of the equity today is $600mm. It has never paid dividends.   Assume a tax rate of 25%. ( be specific)  

What is the CAGR on your investment?
Assuming you never sold any shares, what taxes have you paid?
You originally bought 1000 shares and sell them all today, what are your net proceeds after tax?

Answer 1

a.

Market Price of Share = Market Value of Equity/Shares Issued

= 600/50 = $12

Authorized capital is the maximum capital that can be issued by the company, whereas the company has issued 50 million shares and have 30 million in the treasury, treasury shares are those which are bought back by the company.

Share Purchase price = $10

CAGR =

Here, No. of years will be 14 because share was purchased in year 1 and sold in year 15, therefore it had 14 years of holding period.

CAGR = = 1.31%

b.

If the share is never sold there are no tax consequences and we would have paid 0 taxes.

c.

No. of shares = 1000

profit per share = 12-10 = $2

Total Profit = 1000*2 = $2000

Profit after tax = 2000 - 2000*25%

= $1500