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P18-1 (similar to) Question Help Tax effects of acquisition Connors Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses over the past few years. As a result of the acquisition, Connors believes that the total protax profits of the merger will not change from their present level for 15 years. The tax loss carryforward of Salinas is $950,000, and Connors projects that its annual earnings before taxes will be $420,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm is in the 20% tax bracket a. If Connors does not make the acquisition, what will be the company's tax liability and earnings after taxes each year over the next 15 yours? b. If the acquisition is made, what will be the company's tax liability and earnings after faxes each year over the next 15 years c. If Salinas can be acquired for $269,000 in cash, should Connors make the acquisition, judging on the basis of tax considerations? (ignore the time value of money) a. Without the acquisition, the firm's tax payment in years 1 through 15 is $ 117600 (Round to the nearest dollar) The firm's earnings after taxes in years 1 through 15 is $ 302400 (Round to the nearest dollar) b. With the acquisition, the firm's tax payment in year 1 is (Round to the nearest dollar)

Answer 1

solution 6 of the Acauisition made, the company's tan liability and earning's after taves each year over the next is gears . year- year - 2 year - 3 year 4-15 4,20,000 4,20,000 4,20,000 4,20,000 Particulars Annual earning's before taxes Less TON LOS earning after setting off Tax Los Less: Th@ 28% (4,20,000) 4.20,000) (,10,000) 3,10,000 - 4.20,00 (86,800) 1114,600 2.93,200 3,02.400 Annual earning's after taxes 1 If company's does not acquire, tatal earning's after tax will be = 3,02400x15 =$45,36.000 of company's to Acauires, Total earning's after tax will be - 9,23.2004+)3.02.400 X 12 -$38, 52,000

of company Acquires then, total saving is = u5, 36,000/-) 38.52.000 -86.84.000 by observing the above we can conclude that saling can be acauired for $2,69,000