In September 2008, the IRS changed tax laws to allow banks to utilize the tax lo

Question

In September 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield their future income from taxes (prior law restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquires Covia Bank and with it acquires $76 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of 11 billion per year in the future, and its tax rate is 30%, what is the present value of these acquired tax loss carryforwards given a cost of capital of 8%

Explanation / Answer

Total tax loss carryforwards= $76 billion

PV of  tax loss carryforwards= $76 billion/1.08=$70.37 billion ....Assuming tax loss carryforwards are realized the next year

PV of Total Tax saved from these  tax loss carryforwards= PV of tax loss carryforwards*Tax rate= $70.37 billion*30%=$21.11 billion

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