Tax benefits and price Hahn Textiles has a tax loss carryforward of $806,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Inves earnings before taxes of $201,500 per year for each of the next 7 years and a cost of capital of 14.9%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table, 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 14.9%. The corporate tax rate is 21%. a. What is the tax advantage of the merger each year for Reilly? b. What is the tax advantage of the merger each year for Webster? c. What is the maximum cash price each interested firm would be willing to pay for Hahn Textiles? (Hint: Calculate the present value of the tax advantages.) d. Use your answers in parts a through c to explain why a target company can have different values to different potential acquiring firms. a. Reilly's tax advantage from the acquisition in year 1 is $. (Round to the nearest dollar.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) example Get more help - Year Webster Industries Earnings before taxes 1 $80,000 2 $121,000 3 $199,000 4 $302,000 5 $400,000 6 $402,000 7 $501,000 Print Done 12:27 PM
Tax benefits and price Hahn Textiles has a tax loss carryforward of $806,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Inves earnings before taxes of $201,500 per year for each of the next 7 years and a cost of capital of 14.9%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table, 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 14.9%. The corporate tax rate is 21%. a. What is the tax advantage of the merger each year for Reilly? b. What is the tax advantage of the merger each year for Webster? c. What is the maximum cash price each interested firm would be willing to pay for Hahn Textiles? (Hint: Calculate the present value of the tax advantages.) d. Use your answers in parts a through c to explain why a target company can have different values to different potential acquiring firms. a. Reilly's tax advantage from the acquisition in year 1 is $. (Round to the nearest dollar.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) example Get more help - Year Webster Industries Earnings before taxes 1 $80,000 2 $121,000 3 $199,000 4 $302,000 5 $400,000 6 $402,000 7 $501,000 Print Done 12:27 PM
Chapter2: The Domestic And International Financial Marketplace
Section2.A: Taxes
Problem 5P
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Question
Transcribed Image Text:Tax benefits and price Hahn Textiles has a tax loss carryforward of $806,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Inves
earnings before taxes of $201,500 per year for each of the next 7 years and a cost of capital of 14.9%. Webster Industries has expected earnings before taxes for the next 7 years as shown
in the following table, 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 14.9%. The corporate tax rate is 21%.
a. What is the tax advantage of the merger each year for Reilly?
b. What is the tax advantage of the merger each year for Webster?
c. What is the maximum cash price each interested firm would be willing to pay for Hahn Textiles? (Hint: Calculate the present value of the tax advantages.)
d. Use your answers in parts a through c to explain why a target company can have different values to different potential acquiring firms.
a. Reilly's tax advantage from the acquisition in year 1 is $. (Round to the nearest dollar.)
Data table
(Click on the icon here in order to copy the contents of the data table below
into a spreadsheet.)
example
Get more help -
Year
Webster Industries
Earnings before taxes
1
$80,000
2
$121,000
3
$199,000
4
$302,000
5
$400,000
6
$402,000
7
$501,000
Print
Done
12:27 PM
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