Fred is an investor in vacant land. When he thinks he has identified property that would be a good investment, he approaches the landowner, pays the landowner for a "right of first refusal" to purchase the land, records this right in the property records, and then waits to see if the land increases in value. The right of first refusal is valid for four years. Fourteen months ago, Fred paid a landowner $9,000 for a right of first refusal. The land was selected as the site of a new shopping center, and the landowner was offered $1,000,000 for the land. In its title search on the land, the buyer discovered Fred's right of first refusal and involved him in the purchase negotiations. Ultimately, the landowner paid Fred $220,000 to give up his right of first refusal; the landowner then sold the land to the buyer for $1,220,000. Fred has a marginal tax rate of 37%. a. What difference does it make whether Fred treats the right of first refusal as an option to purchase the land? If Fred treats the right of first refusal as an option, he will have $ of If Fred does not treat the right of first refusal as an option, then Fred has b. What difference does it make whether Fred is a "dealer" in land? If Fred is a dealer in land, then the right of first refusal will produce of
Fred is an investor in vacant land. When he thinks he has identified property that would be a good investment, he approaches the landowner, pays the landowner for a "right of first refusal" to purchase the land, records this right in the property records, and then waits to see if the land increases in value. The right of first refusal is valid for four years. Fourteen months ago, Fred paid a landowner $9,000 for a right of first refusal. The land was selected as the site of a new shopping center, and the landowner was offered $1,000,000 for the land. In its title search on the land, the buyer discovered Fred's right of first refusal and involved him in the purchase negotiations. Ultimately, the landowner paid Fred $220,000 to give up his right of first refusal; the landowner then sold the land to the buyer for $1,220,000. Fred has a marginal tax rate of 37%. a. What difference does it make whether Fred treats the right of first refusal as an option to purchase the land? If Fred treats the right of first refusal as an option, he will have $ of If Fred does not treat the right of first refusal as an option, then Fred has b. What difference does it make whether Fred is a "dealer" in land? If Fred is a dealer in land, then the right of first refusal will produce of
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 16-28 (LO. 3)
Fred is an investor in vacant land. When he thinks he has identified property that would be a good investment, he approaches the
landowner, pays the landowner for a "right of first refusal" to purchase the land, records this right in the property records, and then waits to
see if the land increases in value. The right of first refusal is valid for four years. Fourteen months ago, Fred paid a landowner $9,000 for a
right of first refusal. The land was selected as the site of a new shopping center, and the landowner was offered $1,000,000 for the land. In
its title search on the land, the buyer discovered Fred's right of first refusal and involved him in the purchase negotiations. Ultimately, the
landowner paid Fred $220,000 to give up his right of first refusal; the landowner then sold the land to the buyer for $1,220,000. Fred has a
marginal tax rate of 37%.
a. What difference does it make whether Fred treats the right of first refusal as an option to purchase the land?
If Fred treats the right of first refusal as an option, he will have $
of
If Fred does not treat the right of first refusal as an option, then Fred has
b. What difference does it make whether Fred is a "dealer" in land?
If Fred is a dealer in land, then the right of first refusal will produce
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