Question

a buys b for $15 per share and the tax rate is 20%. how much in pre tax synergies do you need to make the transaction breakeven? company a sp $30, so 150, ni $300 company b sp $10, so 100, ni $50

Answer 1

In order to make the transaction breakeven, you would need $250 million in pre-tax synergies.

Step-by-step explanation:

In order to make the transaction breakeven, we need to calculate the pre-tax synergies. First, let's calculate the net income (NI) for company A after tax. Given that the tax rate is 20%, we multiply the net income by (1 - tax rate). So for company A, the NI after tax is $300 * (1 - 0.20) = $240. Similarly, for company B, the NI after tax is $50 * (1 - 0.20) = $40.

To calculate the pre-tax synergies needed, we use the formula: pre-tax synergies = (NI_A after tax - NI_B after tax) / (1 - tax rate). Plugging in the values, we get: pre-tax synergies = ($240 - $40) / (1 - 0.20) = $200 / 0.80 = $250 million.

Therefore, you would need $250 million in pre-tax synergies to make the transaction breakeven.