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Math Help - Two Finance Problems (Tax benefit acquisition)

  1. #1
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    Dec 2008
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    Two Finance Problems (Tax benefit acquisition)

    Hello; I have been doing my finals over the last couple of days (100 questions. someone kill me.) There have been two questions that I cannot solve. Are there any finance guru's who can assist me? Thanks!

    Question 1)

    Snacks inc is evaluating the acquisition of MiniatureKettle inc. which had a loss carryforward of $2.75 million that resulted from earlier operations. Snacks can purchase MiniatureKettle for $3.5 million and liquidate the assets for $1.25 million. Snacks expects earnings before taxes in the three years following the acquisition to be as follows:

    Year 1 = $800,000 earning before taxes
    Year 2 = $850,000 earning before taxes
    Year 3 = $900,000 earning before taxes

    (these earning are assumed to fall within the limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisiton.) Snacks has a 40 percent tax rate and a cost of capital of 10 percent. The total present value of tax advantage of the acquisition in the following three years is $_____?

    Question 2)
    Aquabox Inc. is evaluating the acquisition of Digi-o-matic inc. which had a loss carryforward of $3.75 million, resulting from earlier operations. Aquabox can purchase Digi-o-matic for $4.5 million and liquidate the assetts for $3.25 million. Aquabox expects earnings before taxes in three years following the acquisition to be as follows:

    Year 1 = $1,270,000 earning before taxes
    Year 2 = $1,662,400 earning before taxes
    Year 3 = $1,275,000 earning before taxes

    (these earning are assumed to fall within the annual limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Aquabox has a 40 percent tax rate and a cost of capital of 15 percent. The approximate cash price Aquabox would be willing to pay for Digi-o-Matic is $______?

    Any assistance would be invaluable! Thanks.
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  2. #2
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    Joined
    Dec 2008
    Posts
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    Tax benefit of acquisition - please help me!!! finance

    Hello; I have been doing my finals over the last couple of days (100 questions. someone kill me.) There have been two questions that I cannot solve. Are there any finance guru's who can assist me? Thanks!

    Question 1)

    Snacks inc is evaluating the acquisition of MiniatureKettle inc. which had a loss carryforward of $2.75 million that resulted from earlier operations. Snacks can purchase MiniatureKettle for $3.5 million and liquidate the assets for $1.25 million. Snacks expects earnings before taxes in the three years following the acquisition to be as follows:

    Year 1 = $800,000 earning before taxes
    Year 2 = $850,000 earning before taxes
    Year 3 = $900,000 earning before taxes

    (these earning are assumed to fall within the limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisiton.) Snacks has a 40 percent tax rate and a cost of capital of 10 percent. The total present value of tax advantage of the acquisition in the following three years is $_____?

    Question 2)
    Aquabox Inc. is evaluating the acquisition of Digi-o-matic inc. which had a loss carryforward of $3.75 million, resulting from earlier operations. Aquabox can purchase Digi-o-matic for $4.5 million and liquidate the assetts for $3.25 million. Aquabox expects earnings before taxes in three years following the acquisition to be as follows:

    Year 1 = $1,270,000 earning before taxes
    Year 2 = $1,662,400 earning before taxes
    Year 3 = $1,275,000 earning before taxes

    (these earning are assumed to fall within the annual limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Aquabox has a 40 percent tax rate and a cost of capital of 15 percent. The approximate cash price Aquabox would be willing to pay for Digi-o-Matic is $______?

    Any assistance would be invaluable! Thanks. (I posted this in the other forum however time is running out! can anybody assist me?)
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