M&A III: Non-Taxable Business Combos

Question 1

Does Target’s S/H prefer taxable or tax-free structure? What factors affect the choice?

Answer 1

• Tax-free structure

- Choice affected by savings from deferred S/H taxes

Question 2

Does Acquiring Co. prefer taxable or tax-free structure?

Answer 2

Indifferent

Question 3

How is Price(tax free) affected by changes to n? Expand.

Answer 3

• Price(tax free) decreases as n increases

- B/c more deferral of S/H level tax

Question 4

If the S/H is a tax-exempt investor, does the S/H prefer a particular structure?

Answer 4

• Indifferent

- Price(tax free) = Price(tax stock) if investor tax-exempt

Question 5

In comparing taxable stock to tax-free acquisitions with boot:

Given that there is an accrued gain in Target co. stock, would Target’s S/H prefer more or less boot in a tax-free acquisition? Why?

Answer 5

• Less boot

- B/c boot triggers gain recognition for tax purposes

Question 6

In comparing taxable stock to tax-free acquisitions with boot:

What happens as more of total consideration is from boot?

Answer 6

• More boot means Price (tax free) increases

- B/c you have more current tax

Question 7

A taxable stock acquisition can be viewed as a tax-free acquisition with what?

Answer 7

100% boot

Question 8

What happens to S/H’s total present value of after-tax wealth as less of S/H level tax is deferred?

Answer 8

• S/H total PV of after-tax wealth decreases as less of S/H level tax deferred

Question 9

How does reducing the accrued gain in Target’s stock (i.e. increase TSTOCKB) affect the Ptf?

Answer 9

• As gain becomes smaller (TSTOCKB increases), there is less tax due on a taxable stock sale
• Price tax free increase s