Problem:
The Thomas Corp desires to expand. It is considering a cash purchase of Cock Enterprises for $3 million. Cock has a $700,000 tax loss carry-forward that could be used immediately by the Thomas Corp, which is paying taxes at the rate of 30%. Cock will provide $420,000 per year in cash flow (after tax income plus depreciation) for the next 20 years.
Required:
Question: If the Thomas Corp has a cost of capital of 13%, should the merger be undertaken?
Note: Provide support for rationale.