Alpha Corp is considering buying Beta Corp for $2,400,000cash. Beta Corp has a $

Question

Alpha Corp is considering buying Beta Corp for $2,400,000cash. Beta Corp has a $600,000 tax loss carry forward thatcould be used immediately by Alpha Corp. Alpha Corp pays tax at therate of 35%. Beta Corp will provide $300,000 per year in cash flow(in after tax income plus depreciation) for the next 20 years. IfAlpha Corp has a cost capital of 11%, should Alpha Corp go forwardwith the acquisition. (Show work/calculations/formulas.) Alpha Corp is considering buying Beta Corp for $2,400,000cash. Beta Corp has a $600,000 tax loss carry forward thatcould be used immediately by Alpha Corp. Alpha Corp pays tax at therate of 35%. Beta Corp will provide $300,000 per year in cash flow(in after tax income plus depreciation) for the next 20 years. IfAlpha Corp has a cost capital of 11%, should Alpha Corp go forwardwith the acquisition. (Show work/calculations/formulas.)

Explanation / Answer

$2,400,000 - $600,000 = $1,800,000 need to buy Beta 11(1-35%) = 7.15% interest rate after tax $300,000*PVIFa(11%,20) = A 1f A is greater than $1,800,000 should buy or not , should notother say if NPV( net present value) is is greater than zero buy it. $300,000 X 20 years = $6,000,000 $6,000,000 - $1,800,000 = $4,200,000 $4,200,000 X 7.15% = $300,300 $4,200,000 - $300,000 = $3,900,000 Alpha Corporation will earn $3,900,000 over the course of 20 years.Alpha Corporation can feel comfortable with this acquisition.

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