Purchase Solution

# Cost of Capital and Purchase Decision

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Alpha Corporation is considering buying Beta Corporation for \$2,400,000 cash. Beta Corporation has a \$600,000 tax loss carryforward that could be used immediately by Alpha Corporation. Alpha Corporation pays tax at the rate of 35%. Beta Corporation will provide \$300,000 per year in cash flow (in after tax income plus depreciation) for the next 20 years. If Alpha Corporation has a cost of capital of 11%, should Alpha Corporation go forward with the acquisition?

##### Solution Summary

This solution calculates the cost of capital. I determine if Alpha Corporation should go forward with the planned acquisition based on a cost of capital of 11%.

##### Solution Preview

2,400,000 - (600,000 x 0.35) =
2,400,000 - 210,000 =
2,190,000

300,000 / 2,190,000 ...

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