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Mergers and acquisitions

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Connor Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses
over the past few years. As a result of the acquisition, Connors believes that the total pretax profits of the merger will not change
from their present level for 15 years. The tax loss carry-forward of Salinas is $800,000. and the Connors projects that its annual
earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings per are assumed to fall
within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm
is in the 40% tax bracket.

A. If the Connors does not make the acquistion, what will the company's tax liability and earnings after taxes each year
over the next 15 years?

B. If the acquisition is made, what will be the company's tax liability and earnings after taxes each year over the next
15 years?

C. If Salinas can be acquired for $350,000 in cash, should Connors make the acquisition, judging on the basis of
tax considerations?(Ignore Present Value)
Data for Henry Company and Mayer Services are given in the following table. Henry Company is considering merging
with Mayer by swapping 1.25 shares of stock for each of Mayer Stock. Henry Company expects its stock to sell
at the same price/earnings multiple after the merger as before merging.

Earninngs Available for common stock
Number of Shares of common stock outstanding
Market Price Per Share

A. Calculate the ratio of exchange in market price

B. Calculate the earnings per share and price/earnings ratio for each company

C. Calculate the price/earnings ratio used to purchase Mayer Services

D. Calculate the postmerger earnings per share for Henry Company.

E. Calculate the expected market price per share of the merged firm. Discuss this result in light of your
findings in part A.

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Solution Summary

The solution explains how to determine the tax liability in an acquisition and the post merger earnings per share

See Also This Related BrainMass Solution

Accounting, tax and legal factors affect an M&A strategy

How does the following effect mergers and acquisitions
o Accounting: Revenue enhancement, cost reduction, and risk management
o Taxes: Shields, synergies, and the weighted average cost of capital
o Legal: Corporate organization and ownership, litigation risk, and legal compliance

Select at least two effects from each category and explain their relevance in pursuing an M&A strategy.

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