Question

In September​ 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield their future income from taxes​ (prior law restricted the ability of acquirers to use these​ credits). Suppose Fargo Bank acquires Covia Bank and with it acquires $ 74$74 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of $ 10$10 billion per year in the​ future, and its tax rate is 30 %30%​, what is the present value of these acquired tax loss carryforwards given a cost of capital of 8 %8%​?

Answer 1

Answer:

The present value of these acquired tax loss is $15.81 billion

Explanation:

We can shield $ 10 billion for the next 7 years and $4 billion in the 8th year

Given the tax rate = 30%

Years 1 - 7, tax savings = $ 3 billion

Year 8, tax savings = $1.2 billion

Present value (PV) = 3 × $\frac{1}{0.08} \{1-\frac{1}{1.08^7} \}$ + $\frac{1.2}{1.08^8}$

= 3 × 12.5(1-0.58) + 0.648

= 3 × 5.25 + 0.648

= 15.75 + 0.648

= $ 15.81 billion

Therefore, the present value of these acquired tax loss is $15.81 billion