Question

Homework: Ch 6B, Making Investment Decisions With the NPV Ru Save Score: 0 of 2 pts 5 of 5 (5 complete) HW Score: 67.31%, 8.75 of 13 pts X P8-21 (similar to) Question Help In September 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield up to 100% of their future income from taxes (prior law restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquired Covia Bank and with it acquired $60 billion in tax loss carryforwards. If Fargo Bank was expected to generate taxable income of $8 billion per year in the future, and its tax rate was 30%, what was the present value of these acquired tax loss carryforwards given a cost of capital of 8%? How would the present value change under current law which restricts the amount of the deduction to 80% of pre-tax income? If Fargo Bank was expected to generate taxable income of $8 billion per year in the future, and its tax rate was 30%, what was the present value of these acquired tax loss carryforwards given a cost of capital of 8%? The present value of these acquired tax loss carryforwards is $12.50 billion. (Round to two decimal places.) Ne St. Fany ystub Raad Paystul Enter your answer in the answer box and then click Check Answer

Answer 1

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Present value of these acquired tax loss carryforward is $25.62 billion $ $ Tax Loss Taxable income tax Rate Cost of Capital 60 billion 8 billion 30% 8% Present value Tax amount Taxable income * tax rate $8 billion * 30% $ 2.40 billion Tax loss carryforwards of banks they acquire to shield up 100% of future income from taxes $60 billion can be used for $ 60 $ 2.40 25 years PV of an annuity of $2.4 billion PV A*(1-(1+r)^(-n))/r A = 2.4 billion r = 8% n = 25 PV $2.4 * (1 - (1+0.08)^(-25))/ 0.08 $2.4 * (1 -0.1460) / 0.08 ($2.4 * 0.854) / 0.08 $2.0496 / 0.08 $25.62 billion PV amount of the deduction to 80 % of pre-tax income: Tax deduction each year $2.4 billion * 80% $ 1.92 billion $60 billion can be used for $ 60 $ 1.92 31.25 years PV of first 30 years will be PV of an annuity of $ 1.92 billion PV A+ (1 - (1+r)^(-n)) /r A = 1.92 billion r = 8% n = 30 PV $1.92 + (1 - (1+0.08)^(-30)) / 0.08 $1.92 + (1 -0.0994) / 0.08 ($2.4 * 0.9006) / 0.08 $2.1614/0.08 $27.02 billion PV for 31th year (60-(1.92*30)) $ 2.40 billion PV for 31st year $2.4/(1+0.08)^31 $2.4 / 10.8677 $ 0.22 billion Tota PV PV of first 30 years + PV of 31st year $ 27.02 billion $ 0.22 billion Tota PV $ 27.24 billion +