Question
P18-2 Tax effects of acquisition Turner and Fitting Company is evaluating the acquisition of steel and Pipes Enterprises for $2.1 million. Steel and Pipes has
P18-2 Tax effects of acquisition Turner and Fitting Company is evaluating the acquisition of steel and Pipes Enterprises for $2.1 million. Steel and Pipes has a tax loss carry-forward of $1.4 million. Some of the assets are deemed redundant and can be sold at their book value of $1.7 million.
The following table shows the estimated earnings before taxes in the 5 years after the merger.
Year Earnings before taxes
1 $180,000
2 $450,000
3 $520,000
4 $640,000
5 $620,000
All estimated earnings are assumed to fall within the annual limit that is legally allowed for application of the tax loss carryforward resulting from the proposed merger (see footnote 2 on page 817). The applicable tax rate is 40%
a. Calculate Turner and Fitting Companys tax payments and earnings after taxes for each of the next 5 years without the merger.
b. Calculate Turner and Fitting Companys tax payments and earnings after taxes for each of the next 5 years with the merger.
c. What are the total benefits associated with the tax losses from the merger? (Ignore present value).
d. Do you recommend the proposed merger? Support your answer with figures.
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