Question

In: Finance

You acquired a building for $100 million and financed the acquisition with a $75 million interest-only...

You acquired a building for $100 million and financed the acquisition with a $75 million interest-only loan. Three years later, you sold the property for $120 million. Assume 70% of the property was attributed to structure and that the structure was depreciated over a 39-year period. Also assume that capital gains are taxed at 15% and that accumulated depreciation is taxed at 25%. Also assume a 3% sales cost for the building and no prepayment penalty for the loan. What would be your net profits?

Solutions

Expert Solution

Calculation of Net profits

Purchase cost of building :     $100 million

Total cost =                 $100 million

Property sold at $120 million

Profit =        $120 million - 100 million

         = $20 million

The depreciation is provided on 70% of the building as it is a structure, so it amounts to $70 million.

The accumulated depreciation is = $70 million / 39 years * 3 years

                                               = $5.3846 million

Accumulated depreciation is taxed @ 25 %, hence 25% of $5.3846 million = $1.3461 million

Capital gain = Profit - tax on accumulated depreciation - sales cost @ 3%

                  = $20 million - $1.3461 - $3.6 million

Capital gain = $15.05

Capital gain is taxed @ 15% = $15.05 * 15% = $2.25 million

Net Profit = Capital gain - tax on capital gain

= $15.05 million - $2.25

= $12.8 million.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

In 2005, North Inc. acquired an 80% interest in South Co. On the date of acquisition,...
In 2005, North Inc. acquired an 80% interest in South Co. On the date of acquisition, the book values of South’s asset and liability accounts at that time were considered to be equal to their fair values. No allocations or goodwill resulted from the combination because North’s acquisition value corresponded to the underlying book value of South The following selected account balances were from the individual financial records of these two companies as of December 31, 2019: . North South...
Consider a firm that is 100% equity financed. The expected net operating income is 200 million,...
Consider a firm that is 100% equity financed. The expected net operating income is 200 million, the corporate tax rate is 35%, and the cost of capital is 8%. (a) Construct the balance sheet. (b) The firm decides to borrow 1000 million at the interest rate 5%. The proceeds are used to repurchase equity in the same amount. Construct the balance sheet with debt financing taking into account the tax deductability of interest. (c) What is cost of equity after...
Divido Corporation is an all-equity financed firm with a total market value of $100 million. The...
Divido Corporation is an all-equity financed firm with a total market value of $100 million. The company holds $10 million in cash equivalents and has $90 million in other assets. There are 1,000,000 shares of Divido common stock outstanding, each with a market price of $100. What would be the impact on Divido's stock price, market value, outstanding shares, and on the wealth of its shareholders? Of the payment of a cash dividend of $10 per share? If the company...
Crook is planning a $100 million expansion to be financed with 20% debt, 5% preferred stock...
Crook is planning a $100 million expansion to be financed with 20% debt, 5% preferred stock and the rest by retained earnings. • The debt consists of 15-year bonds with a coupon rate of 12% paid annually. The face value is $1000 and the bonds are issued at par. (Assume issue costs are negligible). • The preferred stock pays an annual dividend of $3.50 a share and is sold to the public for $27 a share. Issue costs for preferred...
Python acquired 75% of Slither’s stock for $316 million in cash on January 2, 2015. The...
Python acquired 75% of Slither’s stock for $316 million in cash on January 2, 2015. The fair value of the noncontrolling interest in Slither was $89 million. Slither’s book value at that time was $120 million. The assets and liabilities reported on Slither’s balance sheet had balances that approximated fair value at the date of acquisition. However, Slither had previously unreported developed technology (10 year life, straight-line), valued at $40 million. There has been no impairment loss on the developed...
Potato acquired 100% of Salad for $200. At acquisition date Salad had equity of $170, comprised...
Potato acquired 100% of Salad for $200. At acquisition date Salad had equity of $170, comprised as follows: Capital 100 Asset revaluation reserve 20 Retained earnings 50 Equity 170 The book value of net assets was considered to be close to fair value, except for the following: Cost Carrying amount Fair value Land 40 40 50 Equipment 100 50 60 140 90 110 The tax rate is 30%. What is the amount of the business combination reserve (also known as...
Consolidation Eliminations Several Years after Acquisition Paramount Corporation acquired its 75 percent investment in Sun Corporation...
Consolidation Eliminations Several Years after Acquisition Paramount Corporation acquired its 75 percent investment in Sun Corporation in January 2012, for $3,492,000 and accounts for its investment internally using the complete equity method. At the acquisition date, total book value of Sun was $1,800,000 including $960,000 of retained earnings, and the estimated fair value of the 25 percent noncontrolling interest was $948,000. The fair values of Sun's assets and liabilities were equal to their carrying values, except for the following items:...
Consolidation Eliminations Several Years after Acquisition Paramount Corporation acquired its 75 percent investment in Sun Corporation...
Consolidation Eliminations Several Years after Acquisition Paramount Corporation acquired its 75 percent investment in Sun Corporation in January 2012, for $5,820,000 and accounts for its investment internally using the complete equity method. At the acquisition date, total book value of Sun was $3,000,000 including $1,600,000 of retained earnings, and the estimated fair value of the 25 percent noncontrolling interest was $1,580,000. The fair values of Sun's assets and liabilities were equal to their carrying values, except for the following items:...
Cairns owns 75 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired...
Cairns owns 75 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton. On January 1, 2014, Hamilton sold $2,600,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 9...
Cairns owns 75 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired...
Cairns owns 75 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton. On January 1, 2014, Hamilton sold $2,600,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 9...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT