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Tax effects of acquisition Connors Shoe Company is contemplating the acquisition of Salinas Boots, a firm...

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Finance

Tax effects of acquisition Connors Shoe Company iscontemplating the acquisition of Salinas Boots, a firm that hasshown large operating tax losses over the past few years. As aresult of the acquisition, Connors believes that the total pretaxprofits of the merger will not change from their present level for15 years. The tax loss carryforward of Salinas is $800,000, andConnors projects that its annual earnings before taxes will be$280,000 per year for each of the next 15 years. These earnings areassumed to fall within the annual limit legally allowed forapplication of the tax loss carry forward resulting from theproposed merger. The firm is in the 21% tax bracket.

a. If Connors does not make the acquisition, what willbe the company’s tax liability and earnings after taxes each yearover the next 15 years?

b. If the acquisition is made, what will be thecompany’s tax liability and earnings after taxes each year over thenext 15 years?

c. If Salinas can be acquired for $350,000 in cash,should Connors make the acquisition, judging on the basis of taxconsiderations? (Ignore present value.)

show work please and explanation.

Answer & Explanation Solved by verified expert
4.5 Ratings (879 Votes)
Answer a If Connors does not make the acquisition Particulars Amount Annual Earnings before taxes 28000000 Less Tax 21 5880000 Annual Earnings after taxes 22120000    See Answer
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