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Problem:

The Thomas Corp desires to expand. It is considering a cash purchase of Cock Enterprises for $3 million. Cock has a $700,000 tax loss carry-forward that could be used immediately by the Thomas Corp, which is paying taxes at the rate of 30%. Cock will provide $420,000 per year in cash flow (after tax income plus depreciation) for the next 20 years.

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Question: If the Thomas Corp has a cost of capital of 13%, should the merger be undertaken?

Note: Provide support for rationale.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91169391

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