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Problems 1.Tax loss carryforward (LO20-1) The Clark Corporation desires to expand.

Question : Problems 1.Tax loss carryforward (LO20-1) The Clark Corporation desires to expand. : 1553927

Problems

1.Tax loss carryforward (LO20-1) The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for $3 million. Kent has a $700,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30 percent. Kent will provide $420,000 per year in cash flow (aftertax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13 percent, should the merger be undertaken?

2.Tax loss carryforward (LO20-1) Assume that Western Exploration Corp. is considering the acquisition of Ogden Drilling Company. The latter has a $470,000 tax loss carryforward. Projected earnings for the Western Exploration Corp. are as follows:

Total

201120122013Values

Before-tax income.......

$185,000

$250,000

$370,000

$805,000

Taxes (35%)...........

    64,750

  87,500

  129,500

  281,750

Income available
to stockholders........

$120,250

$162,500

$240,500

$523,250

a.How much will the total taxes of Western Exploration Corp. be reduced as a result of the tax loss carryforward?

b.How much will the total income available to stockholders be for the three years if the acquisition occurs? Use the same format as that in the text.

Solution
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