Tax benefits and price Hahn Textiles has a tax loss carryforward of $808,000. Tw

Question

Tax benefits and price Hahn Textiles has a tax loss carryforward of $808,000. Two firms are interested in acquiring Hahn for the tax loss advantage Reily Inves e peded earnings before ta esot S2200 per year or each of he next 7 years and a cost o catal of 14 % Webs er last es has eq ddermpbel et tment Group has the es ed7 years as shown in the following table EEB Both Relly's and Webster's expected earnings are assumed to tall within the arnual lmt legaly allowed for application of the tax loss carryforward resulting from the proposed merger Webster has a cost of apital of 149% Both firms are sut ed to a 34% tax rate on or nary roome. 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 d. Use your answers in parts a through c to explain why a target company can have different values to different potential acquiring firms wiling to pay for Hahn Textiles? (Hint Calculate the present value of the tax advantages.) a. Reily's tax advantage from the acquisition in year 1 is(Round to the nearest dollar) Relily's tax advantage from the acquisition in year 2 s(Round to the nearest dollar) Reily's tax advantage from the acquisition in year 3s(Round to the nearest dollar) Reihy's tax advantage from the acqustion in year 4 is s(Round to the nearest doilan) s contents nto a spreadsheet) Reily's tax advantage from the acquisition in year 5 (Round to the nearest dollar) Reily's tax advantage trom the acquisition in year 6 s(Round to the nearest dolr) Reily's tax advantage from the acquisition in year 7 sRound to the nearest dollar) b. Websters tax advantage trom the acquistion in year 1 is s (Round to the nearest dol Enter your answer in each of the answer boxes Click on the icon located on the top-right corner of the data table below in order to Webster Industries YearE Eornings before taxes 81,000 $120,000 $198,000 $301,000 $402.000 $398,000 5499,000 Print Done

Explanation / Answer

As per rules I will answer the first 4 sub parts of the question

Total tax benefit that can be claimed = 808000*34% = 274720

1: Tax advantage in year 1 = 202000*34% = $68680

Cumulative loss = 68680

2: Tax advantage in year 2 = 202000*34% = $68680

Cumulative loss = 68680*2= $137360

3: Tax advantage in year 3 = 202000*34% = $68680

Cumulative loss = 68680*3= $ 206040

4:

Tax advantage in year 4 = 202000*34% = $68680

Cumulative loss = 68680*4= $ 274720 which is same as maximum advantage.

Hence tax advantage in years 5 to 7 will be zero.

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