The following table contains the facts for this problem. You are working for Cabo (the acquirer), who wants to purchase Golden Gate. Cabo is considering a taxable stock purchase at a price of $150,000 or some type of tax-free acquisition.

Fact Pattern for Problem 4

Purchase price $150,000

Net tax basis of target's assets $20,000

Target shareholders' basis in target stock $5,000

t sub c 35%

t sub cg 20%

Estimated holding period for acquiring firm stock obtained in the merger 4 years

Estimated pretax appreciation in acquirer stock post acquisition 12.500%

r 10.324%

	Tax-Free Acquisition Structures			Taxable Structure
	Section 368 "A" (1)	Section 368 "B" (2)	Section 351 (4)	Stock Sale without a Section 338 Election
Purchase price:	$150,000	$150,000	$150,000	$150,000
Cash Component	60,000	-	90,000	150,000
Stock Component	90,000	150,000	60,000	-

Based on the facts and the data in the table:

a. What is Golden Gate shareholders' after tax wealth under a Section 368 "A" structure based on the terms presented in the table?

b. What is Golden Gate shareholders' after tax wealth under a Section 368 "B" structure based on the terms presented in the table?

c. What is Golden Gate shareholders' after tax wealth under a Section 351 structure based on the terms presented in the table?

d. At what pretax purchase price in a Section 368A will the shareholders of Golden Gate be indifferent, relative to a taxable stock purchase at $150,000?

e. At what pretax purchase price in a Section 368 B will the shareholders of Golden Gate be indifferent, relative to a taxable stock purchase at $150,000?

f. At what pretax purchase price in a Section 351 are the shareholders of Golden Gate indifferent, relative to a taxable stock purchase at $150,000?

g. Ignoring nontax costs, will Cabo prefer one of the tax-free structures relative to the taxable stock acquisition at $150,000? Why?

h. How large would the nontax costs of a Section 368 B have to be to cause Cabo to prefer the taxable stock acquisition at a price of $150,000 relative to the Section 368 B at the pretax price computed in part f?