Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 14.7%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table Webster Industries Year Earnings before taxes 1 $78,000 2 $118,000 3 $201,000 4 $298,000 5 $400,000 6 $398,000 7 $499,000 Both Reilly's and Webster's expected earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. Webster has a cost of capital of 14.7%. Both firms are subject to a 38% tax rate on ordinary income. a. The maximum cash price Webster would be willing to pay for Hahn Textiles is ?
Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 14.7%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table Webster Industries Year Earnings before taxes 1 $78,000 2 $118,000 3 $201,000 4 $298,000 5 $400,000 6 $398,000 7 $499,000 Both Reilly's and Webster's expected earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. Webster has a cost of capital of 14.7%. Both firms are subject to a 38% tax rate on ordinary income. a. The maximum cash price Webster would be willing to pay for Hahn Textiles is ?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 14.7%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table
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Webster Industries
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Year
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Earnings before taxes
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1
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$78,000
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2
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$118,000
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3
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$201,000
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4
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$298,000
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5
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$400,000
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6
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$398,000
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7
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$499,000
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Both Reilly's and Webster's expected earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. Webster has a cost of capital of 14.7%. Both firms are subject to a 38% tax rate on ordinary income.
a. The maximum cash price Webster would be willing to pay for Hahn Textiles is ?
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