Asked by Jessica Pierre on Jun 17, 2024
Verified
The DAB Corp.has unfortunately accumulated net operating losses of $70 million and is likely to go bankrupt.The CLC Corp.has earnings of $200 million and is in the 36% marginal tax bracket.CLC is considering buying DAB and liquidating the company and retaining a few of the assets.What is the minimum value of DAB to CLC?
A) $25.2 million
B) $70.0 million
C) $72.0 million
D) There is insufficient information provided.
Marginal Tax Bracket
The tax rate that applies to the last dollar of the taxpayer's income, illustrating the percentage of tax applied to your income for each tax bracket in which you qualify.
Net Operating Losses
Losses incurred when a company's operating expenses exceed its revenues, which can often be carried forward or backward to reduce future or past taxable income.
- Comprehend the valuation of synergies within mergers and acquisitions, including the implications for taxation.
- Comprehend the financial and taxation implications involved in mergers and acquisitions.
Verified Answer
BR
Brooke RomeroJun 17, 2024
Final Answer :
A
Explanation :
The minimum value of DAB to CLC can be calculated by considering the tax benefits of acquiring a company with net operating losses. CLC can use DAB's net operating losses to offset their taxable income, resulting in a lower tax bill. This tax benefit is equal to the net operating losses multiplied by the marginal tax rate, which is $70 million x 36% = $25.2 million. Therefore, the minimum value of DAB to CLC would be $25.2 million, which is option A.
Learning Objectives
- Comprehend the valuation of synergies within mergers and acquisitions, including the implications for taxation.
- Comprehend the financial and taxation implications involved in mergers and acquisitions.