Question

cu rupe Question Helpo 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 pretax profits of the merger will not change from the present level for 15 years. The tax loss carryforward of Salinas is $850 000 and Connors projects that its annual earnings before taxes will be $370,000 per year for each of the next 15 years These carings are assumed total within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm is in the 25% tax bracket Cormors does not make the acquisition, what will be the company's tax liability and carings after each year over the next 15 years? b. It the acquisition is made what will be the company's a bility and earnings after takes each year over the next 15 years? c. Salinas can be acquired for $200.500 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 through 15 (Round to the nearest dollar)

Answer 1

a	Years	Earnings	Tax Liability	After Tax Earnings
	1 to 15 Yrs	3,70,000	92500	277500
	Total Tax Liability for 15 years :		92500 x 15 =	1387500
b.	Year	Earnings after write off	Tax Liability	Tax Savings
	1	$ 370,000-$ 370,000 = 0	$0	$ 92,500
	2	$ 370,000-$ 370,000 = 0	$0	$ 92,500
	3	$ 370,000-$ 110,000 =        $ 260,000	$ 65,000	$ 27,500
	4 to 15 yrs	$ 370,000 - 0 = $ 370,000	$ 92,500	0
	Total			$ 212,500
c	With respect to tax considerations only, the merger would be recommended because the savings ($212,500) are more than the cost ($209,500).