In September, 2008, the IRS changed tax laws to allow banks to utilize the tax l

Question

In September, 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 had restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquired Covia Bonk and with it acquires $74 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of $11 billion per year in the future, and it tax rate is 30%, what is the present value of these acquired tax loss carry forwards given a cost of capital of 8%?

Explanation / Answer

Answer:

in billion $ in billion $ in billion $ Year Set off of carried lossed (in$) Tax benefit of set off of losses @30% Discount factor @ 8% Discounted tax savings 1 11 3.3 0.9259 3.0555 2 11 3.3 0.8573 2.8291 3 11 3.3 0.7938 2.6195 4 11 3.3 0.7350 2.4255 5 11 3.3 0.6805 2.2457 6 11 3.3 0.6301 2.0793 7 8 2.4 0.5834 1.4002 Total = 74 PV = 16.65474

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