Solved: Cost of capital-should the merger be undertaken, Accounting Basics

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Cost of capital-should the merger be undertaken

Problem:

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 carry forward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30%. Kent will provide the $420, 000 per year in cash flow (after tax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13%, should the merger be undertaken?

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Accounting Basics: Cost of capital-should the merger be undertaken

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