Problem $7-42($Algorithmic$)($LO$.3,5)$

Through a "Type C$"$ reorganization, Springer Corporation was merged into Spaniel Corporation last year. Springer shareholders received

$60\%$ of the Spaniel stock in exchange for all of their Springer shares. Springer liquidated immediately after the exchange. At the time of the

merger, Springer was worth $$2,660,000.$ The Springer shareholders are promised that Spaniel will purchase for $$3,800,000$ all of their

stock five years after the reorganization.

If the shareholders use a $5\%$ discount rate, should this offer be accepted? The present value factor for five years at $5\%$ is $0\mathrm{.}7835.$

$,$ because the present value of receiving $$3,800,000$ in five years using a $5\%$ discount rate is $

X which is

$$ than the value of the stock at the time of the merger.

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In the "Type C$"$ reorganization, the acquiring corporation obtains substantially all of the target's assets in exchange for acquiring voting stock and

a limited amount of other property.