Clark Ski Company is considering an acquisition of Sally Parka Company, a firm that has had big tax losses over the past few years. As a result of the acquisition, Clark believes that the total pretax profits of the merger will not change from their present level for 5 years. The tax loss carryforward of Sally is $800,000, and Connors projects that its annual earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm is in the 40% tax bracket. If Clark does not make the acquisition, (a.)what will be the company’s tax liability and (b.)earnings after taxes in Year 3? If the acquisition is made, (a.)what will be the company’s tax liability and (b.)earnings after taxes in year 3?
Clark Ski Company is considering an acquisition of Sally Parka Company, a firm that has had big tax losses over the past few years. As a result of the acquisition, Clark believes that the total pretax profits of the merger will not change from their present level for 5 years. The tax loss carryforward of Sally is $800,000, and Connors projects that its annual earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm is in the 40% tax bracket. If Clark does not make the acquisition, (a.)what will be the company’s tax liability and (b.)earnings after taxes in Year 3? If the acquisition is made, (a.)what will be the company’s tax liability and (b.)earnings after taxes in year 3?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 2P
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Clark Ski Company is considering an acquisition of Sally Parka Company, a firm that has had big tax losses over the past few years. As a result of the acquisition, Clark believes that the total pretax profits of the merger will not change from their present level for 5 years. The tax loss carryforward of Sally is $800,000, and Connors projects that its annual earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger.
The firm is in the 40% tax bracket.
- If Clark does not make the acquisition, (a.)what will be the company’s tax liability and (b.)earnings after taxes in Year 3?
- If the acquisition is made, (a.)what will be the company’s tax liability and (b.)earnings after taxes in year 3?
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