Name : Gohar Ghaffar

ID : F2019274004

Assignment No # 08

Q. Company A is planning to acquire Company B. Company A is expected to have Income before taxes for next six years close

to $100,000 each year. Company B in it’s last three years has accumulated a loss of around $750,000 around $250,000 each

year. Tax rate for company A is 35%. But it has to take debt to outright buy company B. Please calculate:

1.Tax saving for next five years

2.If debt rate is 2%, how much debt company A can have to be paid it in full next five years with savings from

acquisition. .

Solution:

YEAR 1 2 3 4 5 6 total
Total taxes and after tax earnings without merger
(1)Earnings before taxes 100000 100000 100000 100000 100000 100000 600000
(2)Tax 35% 35000 35000 35000 35000 35000 35000 210000
(3)Earning after taxes(1-2) 65000 65000 65000 65000 65000 65000 390000
Total taxes and after tax earnings with merger
(4(Earnings before losses 100000 100000 100000 100000 100000 100000 600000
(5)Tax loss carryforward 250000 250000 250000 0 0 0 750000
(6)Earnings before -150000 -150000 -150000 100000 100000 100000 -150000

taxes(4-5)
(7)Tax 35% 0 0 0 35000 35000 35000 105000
(8)Earning after taxes(4- 100000 100000 100000 65000 65000 65000 495000

7)
Debt 2% 2000 2000 2000 1300 1300 1300 9900
Earnings after debt 98000 98000 98000 63700 63700 63700 485100