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Tax benefits and price Hahn Teatles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200.000 per year for each of the next 7 years and a cost of capital of 15.2% Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table. Both Rolly's and Webster's expected earnings are assumed to fall within the annual limit fogally allowed for application of the tax foss carryforward resulting from the proposed merger. Webster has a cost of capital of 15.2%. Both firms are subject to a 38% tax rate on ordinary incomo. a. What is the tax advantage of the merger each year for Rolly? b. What is the tax advantage of the merger each year for Webster? c. What is the maximum cash price each interested firm would be willing to pay for Hahn Textiles? (Hint Calculate the present value of the tax advantages.) d. Use your answers in parts a through to explain why a target company can have different values to different potential acquiring firms. Data Table (Click on the con located on the top right corner of the data table below in order to copy its contents into a spreadsheet.) a. Relly's tax advantage from the acquisition in year 1a (Round to the nearest dollar) Reity's tax advantage from the acquisition in year 2 is $ (Round to the nearest dollar) Relly's tax advantage from the acquisition in year 3 is (Round to the nearest dollar) Reilly's tax advantage from the acquisition in year 4 is $(Round to the nearest dotar) Rolly tax advantage from the acquisition in year 5 in $(Round to the nearest dollar) Rallys tax advantage from the acquisition in year 6 is $(Round to the nearest dollar) Rolly's tax advantage from the acquisition in year 7 $(Round to the nearest dollar) b. Webster's tax advantage from the acquisition in year 1 ss (Round to the nearest doit Webster's tax advantage from the acquisition in your 25 (Round to the nearest dollar) Webster's tax advantage from the acquisition in your 35 (Round to the nearest dollar) Webster's tax advantage from the acquisition in year 4 is $. (Round to the nearest dollar) Webster's tax advantage from the acquisition in year 55 ) Round to the nearest dollar) Webster's tax advantage from the acquisition in your ois | Round to the nearest dolar) Webster's tax advantage from the acquisition in your ? is 5 (Round to the nearest dollar) Year 1 2. 3 4 5 6 7 Webster Industries Earnings before taxes $78,000 $122,000 $199,000 $301,000 $400,000 $399,000 $502,000 Print Done Tax benefits and price Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 15.2% Webster Industries has expected earnings before taxes for the next 7 years as shown in the folowing table. Both Relly's and Webster's expected earnings are assumed to fill within the annual limit fogally allowed for application of the tax loss carryforward resulting from the proposed merger. Webster has a cost of capital of 15.2%. Both firms are subject to a 38% tax rate on ordinary income a. What is the tax advantage of the merger each year for Relly? b. What is the tax advantage of the merger each year for Webster? What is the maximum cash price each interested firm would be willing to pay for Hahn Textiles? (int Calculate the present value of the tax advantages) d. Use your answers in parts a through to explain why a target company can have different values to different potential acquiring firme Reily tax advantage from the acquisition in year 8 $(Round to the nearest dollar) Reilly's tax advantaon from the acquisition in year 7 $ (Round to the nearest dollar) b. Webster's tax advantage from the acquisition in year 15 (Round to the nearest dolar) Webster'n tax advantage from the acquisition in year 2 in ${Round to the no cost dottor) Webater's tax avantage from the acquisition in year 350 (Round to the nearest dollar) Webster's tax advantage from the soquintion in year 4 in (Round to the nearest dollar) Webster's tax advantage from the acquisition in your lo $ (Round to the nearest dollar) Webster's tax advantage from the acquisition in your 6 in $ (Round to the nearest dollar) Webster's tax advantage from the acquisition in year ? $(Round to the nearest dollar) 6. The maximum cash price Reilly would be willing to pay for Hahn Testlos is $. (Round to the nearest sallat) The maximum cash price Webster would be willing to pay for Hahn Textiles is $(Round to the nearest dollar) d. Use your answers in parts a through e to explain why a target company can have different values to different potential acquiring firms Both firms receive similar amounts in tax shield benefits. However, Rolly can use these at an earlier time, therefore, the acquisition is worth more to this firm Is the above statement true or false? (Select from the drop-down menu.) Tax benefits and price Hahn Textiles ha a taxloes carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Groups expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 15,2% Webster Industries has expected eamings before taxes for the next 7 years as shown in the following table, Both Reilly and Webster's expected coming resumed to fol within the annual mit legaly allowed for application of the tax to carrytoward resulting from the proposed merper Webster hon a cost of capital of 15.2%. Both forms are subject to a 30% tax rate on ordinary income a What is the tax advantage of the merger each year for Relly? 1. What is the tax advantage of the merger each year for Webster? c. What is the maximum cash prioe each interested firm would be willing to pay for Hahn Textiles? Hint Calculate the present value of the tax advantages) d. Use your answers in parts a through e lo explain why a target company can have different values to different potential acquiring firms Reilly's tax advantage from the acquisition in year in $ (Round to the nearest dollar) Reilly's tax advantage from the acquisition in your las Round to the nearest dolar) b. Webster's tax advantage from the acquisition in year in $(Round to the nearest dolar) Webster's tax advantage from the acquisition in year 2 is $. (Round to the nearest dollar) Webster's tax advantage from the acquisition in year 3 $. (Round to the nearest dola) Webtor's tax advantage from the acquistion in year 4 in (Round to the nearest dolar) Webster's tax advantage from the acquisition in your 5 is $. (Round to the nearest dolar) Webster's tax advantage from the acquisition in year 6 is $. (Round to the nearest doftar.) Webster's tax advantage from the acquisition in year 7 $(Round to the nearest dollar) c. The maximum cash price Rally would be willing to pay for Hahn Textiles is $(Round to the nearest dollar) The maximum cash price Webster would be willing to pay for Hahn Textiles is $(Round to the nearest dollar) d. Use your answers in parts a through to explain why a target company can have different values to different potential acquiring firms Both firms receive similar amounts in tax shield benefits. However, Reilly can use these at an earlier time, therefore, the acquisition is worth more to this firm Is the above statement true or false? (Select from the drop-down menu.)
