Question

Consider the following facts to quantify the tax costs of various taxable acquisition structures when the target is a freestanding C corporation. Wolverine, Inc., wants to purchase Reel Deal, Inc., in a taxable acquisition. Reel Deal is a freestanding C corporation with a net asset tax basis of $ 250. Reel Deal has no NOLs and is currently owned by five shareholders that have a basis in their Reel Deal stock of $ 5. Wolverine is planning to offer $ 10,000 for all of the assets of Reel Deal. The corporate tax rate is 40%, the after- tax discount rate is 15%, and the shareholder- level capital gains tax rate is 20%.
a. How much cash after tax will the shareholders of Reel Deal have in a taxable asset sale at a price of $ 10,000?
b. What is Wolverine’s net after- tax cost of this transaction, assuming that any step- up in Reel Deal’s ­assets are amortized/ depreciated over 15 years straight line, the appropriate corporate tax rate is 40%, and the after- tax discount rate is 15%?
c. What price could Wolverine pay for Reel Deal in a taxable stock acquisition without a Section 338 election? What would Wolverine’s net after- tax cost of this structure be?
d. Given the price computed in part ( c), what would ADSP be if Wolverine decided to make the Section 338 election? What would Wolverine’s net after- tax cost be with this structure of a taxable stock sale with a Section 338 election?
e. Which structure should be used in this acquisition? Why?


$1.99
Sales0
Views32
Comments0
  • CreatedAugust 06, 2015
  • Files Included
Post your question
5000