Shortly before completing your MBA, you and one of your friends found a company, TH Inc. Your company is a big success - Congratulations! In October of 2023, you are approached by a publicly-held corporation, BigCorp, with an offer acquire all of the outstanding stock of TH for $20 million.

Some background. You and your friend founded TH Inc. in March of 2022, with each of you investing $10,000 in exchange for 10,000 shares of common stock. In June 2022, following a successful prototype of your product (a social-networking app for pets with patent-pending Pawtouch technology), an angel investor (your friend's wealthy grandmother) invested $500,000 in TH Inc. in exchange for 10,000 shares of common stock (for a total of 30,000 shares of common stock outstanding). Assume that all three shareholders face a 20% long-term capital gains rate. By October of 2023, TH Inc. has assets with a tax basis of $200,000, no liabilities, and faces a 21% corporate tax rate.

 A. As structured, how much after-tax cash will the shareholders of TH receive in total in the acquisition? 

B. Another potential buyer emerges, MegaCorp, offering to acquire all of the assets of TH for $22 million. TH would then pay any after-tax proceeds from the sale out to its shareholders in complete liquidation. How much after-tax cash will the shareholders of TH receive in total in the acquisition? 

C. Should you take the $20 million offer from BigCorp or the $22 million offer from MegaCorp? Ignore nontax factors and please explain your decision.

Answer rating: 100% (QA)

Analysis of Acquisition Offers for TH Inc Scenario A Acquisition of Stock by BigCorp Total Acquisiti... View the full answer