Question - Suppose P&G and Gillette went ahead with the taxable acquisition. The next question is whether P&G would find it in beneficial to make a 338 election with respect to Gillette. Assume that the tax basis of Gillette's assets prior to the election is $10 billion and its liabilities are $7 billion. Assume any step-up in tax basis results in additional tax depreciation using straight line over a period of 15 years, and the P&G faces a 35% tax rate and a 10% discount rate. Assume that Gillette has no net operating loss carryovers.
a. Would P&G be wise to make a 338 election with respect to Gillette?
b. What would be the tax cost of the 338 election?
c. What would be the present value of the tax benefit of such an election?
Original transaction for reference in these questions: Assume instead that P&G acquired all of the stock of Gillette in exchange for $53 in cash per share and did not make a Section 338 election. Assume Gillette had 1 billion shares outstanding. Assume P&G issued bonds to raise the cash necessary to pay for the acquisition.