Question

data in second sheet

Tax benefits and price Hahn Texiles has a tax loss carryforward of $800,000 Two ams are interested in acquiring Hahn for the tax loss advantage Reilly Investment Geoup has expected easings before taxes of $200,000 per year for each of the next 7 years and a cost of captal of 15 1% Webster i drin has expected earnings before taxes for the next 7 years as shown n te t 1wing tabl'■ Both Relly's v dwtners exp cted earns are assumed to taa within the am ad limit legally alood for application ofthe tax loss camtorward resutingfrom the proposed merger Webster has a cost orcapitalof151% Both firm, are sub ed to a 34% tax rate on or hary 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? What is the maximum cash price each interested fem would be wiling to pay for Han Texlles? (Hint Calculate the present vas of the tax advantages ) t. Use your anseers in parts a through c to explain why a target company can heve diferent values to different potential acquiring fm a Relly's tax advatage from the scquialtion in year 1 is s (Rond to the nearest a) Relly's tax advantage trom the acoquibition in year 2 sRound to he earest ) Ray ta avantge tom be qui ynhe neot ) the (Click on the icon located on the top-right corner of the data table below in order t copy its contents into a spreadsheet.) copy its contents intot Webster Industries Year Earnings before taxes $80,000 $122,000 $201,000 $302,000 $400,000 $402,000 $501 000 4 5 7

Answer 1

	Reilly Investment
a)
	Year	1	2	3	4	5	6	7
	EBT	200000	200000	200000	200000	200000	200000	200000
	Taxes @ 34%	68000	68000	68000	68000	68000	68000	68000
	Cum. taxes	68000	136000	204000	272000	340000	408000	476000
	Tax loss	800000	800000	800000	800000	800000	800000	800000
	Effective tax	0	0	0	0	0	0	0
	Tax advantage	68000	68000	68000	68000	68000	68000	68000
	Net Cash Flow	200000	200000	200000	200000	200000	200000	200000
	Reilly tax advantage		year 1	68000
	Reilly tax advantage		year 2	68000
	Reilly tax advantage		year 3	68000
b)	Webster
	Year	1	2	3	4	5	6	7
	EBT	80000	122000	201000	302000	400000	402000	501000
	Taxes @ 34%	27200	41480	68340	102680	136000	136680	170340
	Cum. taxes	27200	68680	137020	239700	375700	512380	682720
	Tax loss	800000	800000	800000	800000	800000	800000	800000
	Effective tax	0	0	0	0	0	0	0
	Tax advantage	27200	41480	68340	102680	136000	136680	170340
	Net Cash Flow	80000	122000	201000	302000	400000	402000	501000
	webster tax advantage		year 1	27200
	webster tax advantage		year 2	41480
	webster tax advantage		year 3	68340

Answer 2

500,

Tax benefits and price Hahn Textiles has a tax loss carryforward of.docx

000