8-7

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 $74 billion in tax loss carryforwards. If Fargo Bank was expected to generate taxable income of $10 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?

The present value of these acquired tax loss carryforwards is $________ billion. (Round to two decimal places.)

How would the present value change under current law which restricts the amount of the deduction to 80% of pre-tax income?

The present value of these acquired tax loss carryforwards is $________ billion. (Round to two decimal places.)