Question

In this question we revisit the example of Acme stock purchase vs. Acme asset purchase with the following alternative assumptions (i.e., everything else is assumed the same): (i) marginal corporate tax rate for Acme is 10% and (ii) capital gains tax rate for Acme shareholders is 20% and (iii) the purchase price is $200 million (so, therefore, the consideration offered to shareholders of Acme is $200 million, in addition to the assumption of liabilities of $40,299,000). Please answer the following questions and show your calculations (in Excel): a. Please calculate the net value to shareholders of Acme if they sell using an asset purchase. b. Please calculate the net value to shareholders of Acme if they sell using a stock purchase. c. Please calculate the PV of the tax shield generated by the amortization of the goodwill. Please assume for the purposes of this question that the difference between the purchase price and the book value of assets is 100% allocated to goodwill. Please further assume a 4% discount rate in evaluating the present value of the goodwill generated tax shields. d. Given the above calculations, which transaction structure (asset purchase or stock purchase) would you recommend to the buyer? Which transaction structure would you recommend to the seller? Please explain in detail.

Answer 1

When comparing an asset purchase to a stock purchase for Acme, the net value to shareholders after an asset purchase would be $180 million, whereas after a stock purchase it would be $160 million, due to different tax implications. The present value of the tax shield from goodwill amortization depends on the amortization period and would require further detailed calculations. Typically, a buyer would prefer an asset purchase and a seller would prefer a stock purchase based on tax benefits.

Step-by-step explanation:

Analysis of Asset vs. Stock Purchase for Acme

Asset Purchase Net Value to Shareholders: In an asset purchase, shareholders receive the consideration for the sale of assets after corporate taxes. Since the marginal corporate tax rate is 10%, the company will pay $20 million in taxes ($200 million purchase price * 10%). Therefore, the net value to shareholders would be $180 million ($200 million - $20 million corporate tax).

Stock Purchase Net Value to Shareholders: In a stock purchase, the consideration shareholders receive is subject to the capital gains tax of 20%. Hence, the net value to shareholders would be $160 million after the capital gains tax ($200 million purchase price - $40 million capital gains tax).

Present Value of Goodwill Tax Shield: To calculate the PV of the tax shield from goodwill amortization, we would first find the annual tax shield by multiplying the corporate tax rate by the amount of goodwill amortized each year. Assuming a straight-line amortization, if the entire purchase price over the book value is allocated to goodwill, then we would use the purchase price as the goodwill value. The PV of the tax shield would then be calculated using the 4% discount rate. This requires a detailed calculation assuming the period of amortization.

Considering the calculations, a buyer would typically prefer an asset purchase since they can benefit from the stepped-up basis of the acquired assets and the associated tax deductions. For the seller, a stock purchase would generally be preferred as it results in a lower tax liability for the shareholders (assuming the mentioned tax rates apply).

Answer 2

The net value to shareholders of Acme in an asset sale is $144 million, whereas in a stock sale, it's $160 million. The present value (PV) of the tax shield from goodwill amortization cannot be determined without the book value of Acme's assets. The buyer may prefer an asset purchase, while the seller would benefit more from a stock purchase.

Step-by-step explanation:

To determine the net value to shareholders under an asset purchase, we must consider the corporate tax and the capital gains tax paid by shareholders. First, calculate the amount received by shareholders after the corporate tax is levied on the sale of the assets:

• Sale price of assets: $200 million
• Corporate tax rate: 10%
• Tax on sale: $200 million x 10% = $20 million
• Amount after tax: $200 million - $20 million = $180 million

Now, the net value to shareholders after capital gains tax:

• Capital gains tax rate: 20%
• Tax on capital gain: $180 million x 20% = $36 million
• Net value to shareholders: $180 million - $36 million = $144 million

Under a stock purchase, shareholders are taxed only on the capital gains tax:

• Tax on capital gain: $200 million x 20% = $40 million
• Net value to shareholders: $200 million - $40 million = $160 million

To calculate the present value (PV) of the tax shield from goodwill amortization:

• Goodwill: $200 million - Book value of assets (assuming it is lesser than $200 million)
• Annual tax shield: Goodwill x Corporate tax rate
• PV of tax shield = Annual tax shield / Discount rate = (Goodwill x Corporate tax rate) / 4%

Without the exact book value of assets, the goodwill cannot be accurately computed. Therefore, the PV of the tax shield cannot be determined without additional information.

For the buyer, asset purchase may be preferred as it often allows for a step-up in the basis of the acquired assets, leading to higher future tax deductions. For the seller, a stock purchase would be more beneficial as it results in a higher net value after taxes.