Finance- Acquisitions & Mergers- Tax Implications
1. Gorilla-My-Dreams Safari Inc. is considering a merger with Leapin' Lion Tours. Leapin' Lion will cost $180,000. Due to the merger, Gorilla will have a cost of capital of 11%. After the merger cash inflows as a result of the merger will be $20,000 per year for 3 years and $30,000 per year for the following 12 years. What is the tax implication of the merger if Gorilla is in the 40% tax bracket and Leapin' Lion has a tax loss carryforward of $85,000 (What is the cumulative tax savings)? If Leapin' Lion has no liquidatable assets, how much should be proposed for the acquisition?
2. Tree Huggers Lumber Company wants to acquire Harassed Hippo Petting Zoo as a wildlife rescue and nature habitat. It believes the petting zoo can become profitable and will attract both public attention and provide funds to return wildlife back to the wild. Harassed Hippo has a tax loss carryforward of $800,000. Tree Huggers has an expected EBT for the next 7 years as shown below:
|
YEAR
|
Earnings Before Taxes
|
|
1
|
$80,000
|
|
2
|
120,000
|
|
3
|
200,000
|
|
4
|
300,000
|
|
5
|
400,000
|
|
6
|
400,000
|
|
7
|
500,000
|
Tree Huggers has a cost of capital of 15%. It is in the 40% tax bracket.
a. What is the cumulative tax advantage of the merger?
b. What is the maximum cash price that should be paid for Harassed Hippo? (Consider the npv only)
3. Burning the Midnight Oil Co. is being considered for acquisition by In-the-Dark Lighting. The combination would increase Dark's cash inflows by $25,000 for each of the next 5 years and $50,000 for each of the following 5 years. Burning has high financial leverage and Dark can expect its cost of capital to be 15% if the merger is undertaken. The cash price for Burning is $125,000. Would you recommend the merger?
a. If the cost of capital does not increase, but stays at its current level of 12%, would the merger be acceptable?
4. No Fly Zone Pest Control is considering a merger with Nuking Gnats Insect Repellent. No Fly is expecting EBT after the merger to be $300,000 for the next three years. Nuking has a tax loss carryforward of $450,000. The earnings will fall within the legally allowed limit. No Fly is in the 40% tax bracket. If No Fly has a cost of capital of 16%, please answer the following questions:
a. What is the CUMULATIVE value of Nuking Gnats if only the tax savings are taken into account?
b. What should be the price offered to acquire Nuking Gnats based on its npv?
c. If Nuking Gnats has $125,000 in liquidatable assets, what price should be offered to Nuking Gnats?