Question

You are a summer associate at a large Wall Street investment bank and your direct supervisor has in-formed you that the Sunglass Hut (the acquirer) has engaged your firm to analyze the prospect of ac-quiring RK, Inc., a wholly owned subsidiary of Consumer Devices, Inc. Consider the following relevant facts:
• RK has assets with a net tax basis of $ 800 million and a fair market value of $ 1.9 billion. RK has no liabilities.
• RK is 100% owned by Consumer Devices.
• Consumer Devices has a tax basis in RK stock of $ 1 billion. Consumer Devices acquired this stock 5 years ago.
• Sunglass Hut wants to acquire the stock of RK from Consumer Devices for $ 1.9 billion in cash.
• RK, Consumer Devices, and Sunglass Hut are all C corporations.
• Assume the transaction is structured as a taxable stock sale without a Section 338(h)(10) election.
a. What tax basis in the assets of RK will Sunglass Hut have post acquisition?
b. How much cash after tax will Consumer Devices have from the transaction? Assume Consumer Devices’ marginal tax rate is 35%. Now assume the transaction is structured as a taxable stock sale with a Section 338(h)(10) election.
c. What tax basis in the assets of RK will Sunglass Hut have post acquisition?
d. How much cash after tax will Consumer Devices have? Assume that Consumer Devices’ marginal tax rate is 35%.
e. At what price is Consumer Devices indifferent between a stock sale with a Section 338(h)(10) and a stock sale without a Section 338(h)(10) election at a $ 1.9 billion ­purchase price?
f. At what price is Sunglass Hut indifferent between a stock sale with a Section 338(h)(10) and a stock sale without a Section 338(h)(10) election at a $ 1.9 billion ­purchase price? Assume any basis step-up in RK’s assets in a Section 338(h)(10) transaction is depreciated/ amortized over 10 years and that the appropriate discount rate for any tax savings from these additional deductions is 10%. Assume Sunglass Hut’s tax rate is 35%.
g. Should the Section 338(h)(10) election be made? Why or why not?
h. If Sunglass Hut captured all the net tax benefits associated with the Section 338(h)(10) election (assuming your answer to part [g] is yes), how much lower would its net ­after- tax cost be relative to a sale without a Section 338(h)(10) election at a $ 1.9 billion purchase price?
i. If Consumer Devices captured all the net tax benefits associated with the Section 338(h)(10) election (assuming 338(h)(10) election(assuming your answer to part [g] is yes), how much higher would its after- tax wealth be relative to a sale without a Section 338(h)(10) election at a $ 1.9 billion purchase price?


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  • CreatedAugust 06, 2015
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