MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
15th Edition
ISBN: 9780134479903
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 18, Problem 18.2P
Tax effects of acquisition Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carryforward of $1.8 million. Trapani can purchase Sussman for $2.1 million. It can sell the assets for $1.6 million, their book value. Trapani expects its earnings before taxes in the 5 years after the merger to be as shown in the following table.
| Year | Earnings before taxes |
| 1 | $150,000 |
| 2 | 400,000 |
| 3 | 450,000 |
| 4 | 600,000 |
| 5 | 600,000 |
The expected earnings given are assumed to fall w1th1n the annual limit that is legally allowed for application of the tax loss carryforward resulting from the proposed merger (see footnote 2). Trapani is in the 40% tax bracket.
- a. Calculate the firm’s tax payments and earnings after taxes for each of the next 5 years without the merger.
- b. Calculate the firm’s tax payments and earnings after taxes for each of the next 5 years with the merger.
- c. What are the total benefits associated with the tax losses from the merger? (Ignore
present value .) - d. Discuss whether you would recommend the proposed merger. Support your decision with figures.
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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…
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 ?
Chapter 18 Solutions
MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
Ch. 18.1 - Prob. 18.1RQCh. 18.1 - Prob. 18.2RQCh. 18.1 - Prob. 18.3RQCh. 18.2 - Prob. 18.4RQCh. 18.2 - Prob. 18.5RQCh. 18.3 - Prob. 18.6RQCh. 18.3 - What is the ratio of exchange? Is it based on the...Ch. 18.3 - Prob. 18.8RQCh. 18.3 - Prob. 18.9RQCh. 18.3 - Prob. 18.10RQ
Ch. 18.3 - Prob. 18.11RQCh. 18.4 - Prob. 18.12RQCh. 18.4 - Define an extension and a composition, and explain...Ch. 18.5 - Prob. 18.14RQCh. 18.5 - What is the concern of Chapter 71 of the...Ch. 18.5 - Indicate in which order the following claims would...Ch. 18 - Prob. 1ORCh. 18 - Prob. 18.1STPCh. 18 - Prob. 18.2STPCh. 18 - Prob. 18.1WUECh. 18 - Prob. 18.2WUECh. 18 - Prob. 18.3WUECh. 18 - Prob. 18.4WUECh. 18 - Prob. 18.5WUECh. 18 - Tax effects of acquisition Connors Shoe Company is...Ch. 18 - Tax effects of acquisition Trapani Tool Company is...Ch. 18 - Prob. 18.3PCh. 18 - Prob. 18.4PCh. 18 - Cash acquisition decision Benson Oil is being...Ch. 18 - Prob. 18.6PCh. 18 - Prob. 18.7PCh. 18 - Prob. 18.8PCh. 18 - Prob. 18.9PCh. 18 - Prob. 18.10PCh. 18 - Prob. 18.11PCh. 18 - Prob. 18.12PCh. 18 - Prob. 18.13PCh. 18 - Prob. 18.14PCh. 18 - Prob. 18.15PCh. 18 - Prob. 18.16PCh. 18 - Prob. 18.17P
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