Firm A is a profit making firm whereas Firm B has accumulated losses of ₹1,000 lakh. Firm A acquires firm B. The projected profits before taxes, of firm A, for the next three years are given in the table : Year Projected

CS Professional · Corporate Restructuring, Valuation and Insolvency · PYQS · June 2019
Firm A is a profit making firm whereas Firm B has accumulated losses of ₹1,000 lakh. Firm A acquires firm B. The projected profits before taxes, of firm A, for the next three years are given in the table : Year Projected Profit Amount (in lakh) 1 350 2 500 3 700 Determine the present value of tax gains which the firm A gains on account of merger with firm B. Assume corporate tax rate 35 per cent. Discount rate 12 per cent. Present Value (PV) factor at 12%: one year 0.893, two year 0.797, three year 0.712.

Answer & Explanation:

Present value of tax gains S. No. Particulars Year-1 Year-2 Year-3 1 Profit before tax (PBT) 350 500 700 2 Profit adjusted against loss of Firm-B 350 500 150 (1,000 - 350 - 500) 3 Reduction in tax payment 350 × 0.35 = 122.50 500 × 0.35 = 175.00 150 × 0.35 = 52.50 4 PV factor at 12% 0.893 0.797 0.712 5 PV of tax [(3) × (4) above] 109.39 139.47 37.38 Total tax savings = 109.39 + 139.47 + 37.38 = ₹286.24 lakh

Topics: Valuation

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