Sauce Corporation Is Very Interested in Acquiring a Controlling Interest

question 4

Essay

Sauce Corporation is very interested in acquiring a controlling interest in Pear Corporation to obtain operating efficiencies. Sauce currently owns 30% of Pear, which it bought six years ago for $600,000. Sauce is a fruit processor with assets valued at $3 million and liabilities of $1 million. Pear supplies Sauce with fruit from its orchards that are valued at $4 million with $3 million in mortgages. Pear also has $60,000 in unused general business credits. Sauce has negotiated a restructuring with most of Pear's shareholders. It will exchange one share of its stock for two shares of Pear. Pear's founder, who own 10% of the outstanding common stock, is not willing to relinquish her stock and thus, Sauce cannot own 100% of Pear.
a. What type of reorganization is being used here?
b. What is the value of $60,000 business credits to Sauce Corporation assuming that the Federal long-term tax-exempt rate is 3% and Sauce uses a discount rate of
10%?

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