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betterway betterway
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Jia's Oven Manufacturing is evaluating the acquisition of Cuisinaire Kitchen Appliance Co. Cuisinaire has a loss carryforward of $1.5 million which resulted from earlier operations. Jia's Oven can purchase Cuisinaire for $1.8 million and liquidate the assets for $1.3 million. Jia's Oven expects earnings before taxes in the five years following the acquisition to be as follows:



(These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed acquisition.) Jia's Oven is in the 40 percent tax bracket and has a cost of capital of 17 percent.
(a)   What is the tax advantage of the acquisition each year for Jia's Oven?
(b)   What is the maximum cash price Jia's Oven would be willing to pay for Cuisinaire?
(c)   Do you recommend the acquisition? Why or why not?
Textbook 
Principles of Managerial Finance

Principles of Managerial Finance


Edition: 14th
Authors:
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donnabandonnaban
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