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tax implication example

# tax implication example - 50-30=\$20M Taxes = gain x tax...

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M&A Tax Implications Example Given: \$50M Purchase Price \$30M BV of target’s assets 40M appraised value of target’s assets 35% Corp. tax rate Target has no debt What is implications to: 1) target shareholders 2) post-merger asset values 3) taxes to post-merger firm Under these conditions: A) Acquiring firm pays mostly stock B) Acquiring firm pays mostly cash/debt and buys target’s assets C) Acquiring firm pays mostly cash/debt and buys target’s stock and: i) records assets at target’s BV ii) records assets at target’s appraised value Answer: A) Nontaxable offer: 1) target S/Hs have no taxes at time of merger (only when sale – tax on gain where gain is equal to difference between Acquiring firm’s price and original target stock price it was bought at) 2) Assets = \$30M 3) Deprec. Same as old schedule B) Taxable offer buying assets 1) Acquiring firm has to pay taxes (or target does which means acq. Firm). Gain = Purchase price(i.e. “PP”) – target’s BV of assets =

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Unformatted text preview: 50-30=\$20M Taxes = gain x tax rate = 20M x .35 = \$7M Target gets PP – taxes = \$50 – 7 = \$43M to distribute to target S/Hs. Then target has to pay individual taxes on their gain on their stock. 2,3) Asset Value written up to appraised value =\$40M Goodwill = PP – Appraised value of assets = \$50-40=\$10M, amortized over 15 years for income tax purposes. C) Taxable offer buying stock i) Records assets at target’s BV 1) same as B(1) 2) Assets = target BV = \$30M 3) No goodwill created. Target SHs pay tax at individual level. No tax advantage for Acquiring firm. ii) Records assets at target’s BV 1) This is where we are not sure – the textbook gives 2 different answers! p. 921’s example implies gain = PP – Appraised Value and p. 922 table says gain = Appraised Value – BV. So you won’t be tested on this part!!! 2) Assets = \$40M 3) Goodwill created = PP-Appraised Value = 50-40=\$10M...
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