Armor Corporation is considering the acquisition of Kennel Corporation's stock in exchange for cash. Two options are underreview: (1) Armor purchases the assets from Kennel for $1.8 million or(2) Armor purchases the Kennel stock for $0.9 million and makes a Sec. 338 election shortly after the stockpurchase. Kennel has no NOL or capital loss carryovers. Kennel's balance sheet is presented below.

Assets

Adjusted Basis

FMV

Liabilities and Equity

Amount

Cash

$110,000

$110,000

Short-term debt

$100,000

Marketable securities

100,000

120,000

Long-term debt

800,000

Accounts receivable

140,000

140,000

Paid-in capital

80,000

Inventory (FIFO)

120,000

180,000

Retained earnings

820,000

Plant and equipment

80,000

700,000

Intangibles

- 0 -

550,000

Total

$550,000

$1,800,000

Total

$1,800,000

a.What advantages would accrue to Armor if it purchases the assets directly? What disadvantages would accrue to Kennel if it sells the assets and then liquidates?

b.What advantages would accrue to Armor if it purchases the Kennel stock for cash and subsequently makes a Sec. 338 election? What advantage would accrue to Kennel if its shareholders sell the Kennel stock?

c.How would your answers change if Kennel had incurred $150,000 of NOLs in the current year that it cannot carry back in full due to insufficient taxable income in the preceding two years?

The NOL incurred by Kennel in the current year (can reduce/will increase) the cost of making the Sec. 338 election. Assuming a tax rate of 34%, the NOL will (increase/decrease) the tax cost by $_______