At the time of Bradley's death, he owned 60% of the stock of Sigma Corporation, a closely held family business.Over the past five years, Sigma has averaged annual profits of $300,000 in an industry where the usual rate of return is 8%.If the book value of Sigma Corporation's assets is $2,500,000 and goodwill exists, what might be a realistic value for the stock included in Bradley's gross estate?

Question

Quizplus · Accepted Answer

To determine the value of the stock included in Bradley's gross estate, we can use the formula:

Valuation of Sigma Corporation = (Average annual profits / Industry rate of return) + Book value of assets + Goodwill

Valuation of Sigma Corporation = ($300,000 / 0.08) + $2,500,000 + Goodwill

Valuation of Sigma Corporation = $3,750,000 + Goodwill

Since Bradley owned 60% of the stock, we can calculate the value of his stock as:

Value of Bradley's stock = 0.6 x ($3,750,000 + Goodwill)

We don't have information about the value of goodwill, so we can't calculate the exact value of Bradley's stock. However, we can eliminate options A and C because they are too high and too low, respectively. Option D is too low, given the information provided. Therefore, the best choice is option B, which is a reasonable estimate for the value of Bradley's 60% stock in Sigma Corporation.

At the Time of Bradley's Death, He Owned 60% of the Stock