P18-3 Tax benefits and price Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 15%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table.Year Earnings before taxes1--> $80,0002--> 120,0003--> 200,0004--> 300,0005--> 400,0006--> 400,0007--> 500,000Both Reilly�s and Webster�s expected earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger (see footnote 2 on page 719). Webster has a cost of capital of 15%. Both firms are subject to a 40% tax rate on ordinary income.a. What is the tax advantage of the merger each year for Reilly?b. What is the tax advantage of the merger each year for Webster?c. What is the maximum cash price each interested firm would be willing to pay for Hahn Textiles? (Hint: Calculate the present value of the tax advantages.)d. Use your answers in parts a through c to explain why a target company can have different values to different potential acquiring firms.
P18.11 EPS and post merger price Data for Henry Company and Mayer Service are given in the following table. Henry Company is considering merging with Mayer by swapping 1.25 shares of its stock for each share of Myer stock. Henry Company expects its stock to sell at the same price/earnings (P/E) multiple as before.
Item Henry Company Mayer Services
Earning available for common stock $225,000 $50,000
Number of shares of common stock outstanding 90,000 15,000
Market price per share $45 $50
a) Calculate the ratio of exchange in market price
b) Calculate the earning per share (EPS) and price/earning (P/E) ratio for each company
c) Calculate the price/earnings (P/E) ratio used to purchase Mayer Service
d) Calculate the post merger earning per share (EPS) for Henry Company
e) Calculate the expected market price per share of the merged firm. Discuss this result in light of your findings in part a.
P18.12 Holding company Scully Corporation holds enough stock in company A and company B to give it voting control of both firms. Consider the accompanying simplified balance sheets fore these companies
18.14 Voluntary settlement For a firm with outstanding debt of $125,000, classify each of the following voluntary settlements as a compensation, or a combination of the two.
a) Paying a group of creditors in full in four periodic installments and paying the remaining creditors in full immediately.
b) Paying a group of creditors 90 cents on the dollor immediately and paying the remaining creditors 80 cents on the dollar in two periodic installments.
c) Paying all creditors 15 cents on the dollar.
d) Paying all creditors in full in 180 days.