Saturn, Inc. is considering acquiring Titan, Inc. and one major reason of the ac

Question

Saturn, Inc. is considering acquiring Titan, Inc. and one major reason of the acquisition is to use tax loss of Titan. Assume Titan has a tax loss carryforward of $1,600,000. Saturn can purchase Titan for $2,800,000. It can sell the assets for $2,400,000 now. Saturn expects earnings before taxes in the 5 years after the merger to be as shown in the following table:

Prepare a spreadsheet for the results you obtained in part a and part b.

a. Calculate the Saturn's tax payments and earnings after taxes for each of the next 5 years without the merger.

b. Calculate the Saturn's tax payments and earnings after taxes for each of the next 5 years with the mergers.

c. Find out the total benefits associated with tax losses from the merger (assume the discount rate is 5%).

d. Calculate the net price Saturn needs to pay for Titan?

e. Based on the above calculations, would you recommend the proposed merger?

Year Earnings before taxes 1 $200,000 2 $450,000 3 $450,000 4 $800,000 5 $800,000

Explanation / Answer

a.

b.

c.

So the total benefit is $909000

d.

net price to be paid to Titan:

2800000+909000-2400000 = $1309000

e. yes

Year Earnings before taxes tax tax payment 1 200000 0.4 80000 2 450000 0.4 180000 3 450000 0.4 180000 4 800000 0.4 320000 5 800000 0.4 320000 Total tax 1080000

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