Parent Corporation Owns 70% of Sam Corporation's Single Class of Stock

question 21

Multiple Choice

Parent Corporation owns 70% of Sam Corporation's single class of stock. This year, Parent Corporation purchases for cash the remaining 30% of Sam Corporation's stock from four individual investors pursuant to a tender offer. A plan of liquidation is approved by Sam Corporation's shareholders during the last month of this year, and Sam Corporation's assets are distributed by year-end to Parent Corporation in exchange for all of Sam's outstanding stock. Parent Corporation should

• A)not recognize any gains and losses on the redemption.
• B)recognize gains and losses on the redemption.
• C)recognize gains but not losses on the redemption.
• D)recognize losses but not gains on the redemption.

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Definitions:

Sensitivity Analysis

is a technique used to determine how different values of an independent variable will affect a particular dependent variable under a given set of assumptions.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time, used in capital budgeting to assess the profitability of investments.

Variable Costs

Variable Costs are expenses that vary directly with the level of output or production, such as materials and labor costs.

NPV Calculations

A method used to evaluate the profitability of an investment by calculating the difference between the present values of cash inflows and outflows over a period of time.