Tax benefits and price Hahn Textiles has a tax loss carryforward of $800,000. Two firmsare 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 cost of capitalof 15%. Webster Industries has expected earnings before taxes for the next7 years as shown in the following table:

Webster Industries Earnings before taxes year

1 $80,000

2 120,000

3 200,000

4 300,000

5 400,000

6 400,000

7 500,000

Both Reilly's and Webster's expeted earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger (see footnote 2 on page 727), Webster has a cost of capitalof15%. Both firms are subject to a 40% tax rate on ordinary income.

a) What is the tax advantage of the merger each year for Reilly?

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? (Hine: Calcculate the present value of the tax advantages.)

d) Use your answers in parts a through c to explain why a targetcopany can have different values to different potential acquiring firms.