Question: Tax effects of acquisition Connors Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large opening tax losses over the past few years. As a result of the acquisition, Connors believes that the total pretax profits of the will not charge from their present level for 15 years. The tax loss carryforward of Salinas is $750,000, 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 38% tax bracket.
a. If Connors does not make the acquisition, what will be the company's tax liability and earnings after taxes each year over the next 15 year?
b. If the acquisition is made, what will be the company's tax liability and earnings after taxes each year over the next 15 year?
c. if Salinas can be acquired for $281,000 in cash, should Connors make the acquisition, judging on the basis of tax consideration? (Ignore the value of money.)