EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 8, Problem 21P
Summary Introduction

To determine: The present value of acquired tax loss carried forward.

Introduction:

The present value is an amount that an individual has to make in an investment at present, in order to generate cash flow in future. The present value of the cash flows can be computed by adding the cash flow of every stream.

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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 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%? NOTE: Assume that the firm can use tax lass carryforwards to write-off 100% of its earnings
First Bank has some questions as to the tax-free nature of $5 million of governmental bonds held in its investment portfolio. This amount is excluded from First Bank's taxable income of $55 million. Management has determined that there is a 65% chance that the tax-free status of this entire amount of interest can't withstand scrutiny of tax-ing authorities. Assuming a 25% tax rate, what amount of income tax expense should the bank report?
First Bank has some question as to the tax-free nature of $5 million of its municipal bond portfolio. This amount is excluded from First Bank’s taxable income of $55 million. Management has determined that there is a 65% chance that the tax-free status of this interest can’t withstand scrutiny of taxing authorities. Assuming a 40% tax rate, what amount of income tax expense should the bank report?
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