Which of the Following Statements Regarding Mergers and Taxes Is

question 58

Multiple Choice

Which of the following statements regarding mergers and taxes is FALSE?

• A)Carryback and carryforward provisions essentially deliver the benefits of conglomeration to a small firm with volatile earnings.
• B)It might appear that a conglomerate has a tax advantage over a single-product firm simply because losses in one division can offset profits in another division.
• C)Companies with current-year losses can also use them to offset earnings (carryback)for the twenty prior years.
• D)The IRS will disallow a tax break if it can show that the principal reason for a takeover is tax avoidance,so it is unlikely that the tax advantage could,by itself,be a valid reason to acquire another firm.

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Definitions:

Discounted Payback Period

The period it takes for the cash flows from a capital investment project to equal the initial investment cost, considering the time value of money.

After-Tax Cash Flows

After-tax cash flows are the net cash inflows and outflows of a business after taxes have been accounted for, used in analysis of investment projects.

Liquidation

The process of bringing a business to an end and distributing its assets to claimants, often when the company is insolvent.

NPV

Net Present Value; a financial metric used in capital budgeting to analyze the profitability of an investment or project, calculated by the difference between the present value of cash inflows and outflows over a period of time.