Question

b,c,d

Question Help Tax effects of acquisition Trapani Tool Company is evaluating the acquisition of Sussman Casting Sussman has a loss carryforward of 52.100,000. Trapanican purchase Sussman for $3,000,000. I can see the assets for $2.400,000, their book value. Trapani expects earnings before taxes in the 5 years after the merger to be as shown in the following table The expected earnings given are assumed to fall within the annual limit that is legally allowed for application of the ta loss carryforward resulting from the proposed merger 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? Ognore the time value of money) d. Discuss whether you would recommend the proposed merger Support your decision with figures The firm's earnings after taxes in year 2 is $ 180000 Data Table Without the merger, the firm's tax payment in years The firm's earnings after we in year is 5240000 Without the merger, the firm's tax payment in year 4 The firm's eamings a r e in year45 5540000 Click on the con located on the o t come of the data we below in order to CODY contents into a spreadsheet) Year Earnings before taxes $150.000 $300.000 $400,000 $900.000 $900.000 Without the merger, the firm's tax payment in year 55 The firm's earnings were in year 5 is 5540000 b. With the merger, the firm's tax payment in year 15 Print Done Enter your answer in the answer box and then click Ch 14 parts

Answer 1

a)
Year	Earning before Taxes	Tax @ 40%	Earning after tax before merger
1	$150,000	$60,000	$90,000
2	$300,000	$120,000	$180,000
3	$400,000	$160,000	$240,000
4	$900,000	$360,000	$540,000
5	$900,000	$360,000	$540,000
Total Taxes without merger	$2,650,000	1060000
b)
Year	Earning before Taxes		Tax @ 40%	Earning after tax before merger
1	150000 -150000	$0	$0	$0
2	300000 - 300000	$0	$0	$0
3	400000 - 400000	$0	$0	$0
4	900000 - 900000	$0	$0	$0
5	900000 - 3500000*	$550,000	$220,000	$330,000
Total Taxes with merger			$220,000	$330,000
* $2650000-2100000 = $550,000
c)
Total benefits = $1060000 - $330000	$840,000
d)
Net benefit(loss) = Tax benefits − (cost − liquidation of assets)
Net loss = 2,100,000 x 40% − ($3,000,000 − $2,400,000)	$240,000
The proposed merger is recommended based on the positive net benefit of $240,000.