Problem:
Baker's Manufacturing is evaluating the acquisition of Cuisinaire Appliance. Cuisinaire has a loss carryforward of $1.5 million which resulted from earlier operations. Baker's Oven can purchase Cuisinaire for $1.8 million and liquidate the assets for $1.3 million. Baker's Oven expects earnings before taxes in the five years following the acquisition to be as follows: Year Earnings before Taxes 1 $108,000 2 288,000 3 324,000 4 425,000 5 425,000 (These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carry-forward resulting from the proposed acquisition.) Baker's Oven is in the 40% tax bracket and has a cost of capital of 17%
Requirement:
Question 1: What is the tax advantage of the acquisition each year for Baker?
Question 2: What is the maximum cash price Baker's would be willing to pay for Cuisinaire?
Question 3: Do you recommend the acquisition? Why or why not?
Note: Please show guided help with steps and answer.