In Sept. 2008, the IRS changed tax laws to allow banks to utilize the tax loss c

Question

In Sept. 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield their future income from taxes (prior law restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquires Covia Bank and with it acquires $74 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of 10 billion per year in the future, and its tax rate is 30%, what is the present value of these acquired tax loss carryforwards given a cost of capital of 8%?

Explanation / Answer

Present value of the acquired tax loss carryforwards = $10 billion / (1+8%) + $10 billion / (1+8%)2 + $10 billion / (1+8%)3 + $10 billion / (1+8%)4 + $10 billion / (1+8%)5 + $10 billion / (1+8%)6 + $10 billion / (1+8%)7 + $4 billion / (1+8%)8

= $54.22 billion

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