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What is sfco''s shareholders after-tax wealth from stock sale

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Reference no: EM133513435

ShanghaiCo (the acquirer, a C corporation), wants to purchase SFCo (a C corporation).

ShanghaiCo is considering purchasing the stock from SFCo's shareholders for $250,000 in cash. However, ShanghaiCo and SFCo are also considering an asset deal where ShanghaiCo purchases the assets of SFCo for $250,000. Assume that all of the after-tax proceeds from an asset sale are distributed to SFCo's shareholders in liquidation of their interest in the corporation (i.e, create taxable capital gain).

Purchase Price - Cash $250,000

Net tax basis of SFCo's assets (assume no liabilities) - 55,000

SFCo's shareholders' basis in SFCo's stock - 75,000

Corporate tax rate tc - 21%

Shareholder capital gains tax rate tcg - 20%

Average life of the assets purchased - 10 years

Discount rate (r) - 7.5%

a. What is SFCo's shareholders' after-tax wealth from a stock sale?

b. What is SFCo's shareholders' after-tax wealth from an asset sale?

c. What is ShanghaiCo's cost of the stock purchase?

d. What is ShanghaiCo's cost of the asset purchase (hint - what is the value of the potential step-up to ShanghaiCo)?

Reference no: EM133513435

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