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Tax effects of acquisition Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carryforward of $2,200,000. Trapani can purchase

Tax effects of acquisition Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carryforward of $2,200,000. Trapani can purchase Sussman for $3,000,000. It can sell the assets for $2,400,000, their book value. Trapani expects earnings before taxes in the 5 ears after the merger to be as shown in the following table:

The expected earnings given are assumed to fal within the annual limit that is legally allowed for application of the tax loss carryforward resulting from the proposed merger. Trapani is in the 40% tax bracket.

a. Calculate the firm's tax payments and earnings after taxes for each of the next 5 years without the merger.

b. Calculate the firm's 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 the time value of money.)

d. Discuss whether vou would recommend the proposed merger. Support your decision with figures

image text in transcribed
\begin{tabular}{cc} \hline Year & Earnings before taxes \\ \hline 1 & $100,000 \\ 2 & $500,000 \\ 3 & $600,000 \\ 4 & $700,000 \\ 5 & $700,000 \\ \hline \end{tabular}

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