Present Value Tables Needed for This Question

question 33

Essay

Present Value Tables needed for this question. Avocado Corporation wants to acquire Tomato Corporation because their businesses are complementary and Tomato has unused business credits of $63,000. Avocado is a manufacturer with a basis in its assets of $2.4 million (value of $3.1 million) and liabilities of $600,000. It is in the 35% tax bracket and uses a 10% discount factor when making investments. However, the Federal long-term tax-exempt rate is only 5%. Tomato is a distributor of a variety of products including those of Avocado's. Its basis in its assets is $2 million (value of $1.5 million) and has liabilities of $400,000. Avocado is willing to acquire only $1 million of Tomato's assets and all its liabilities for stock and $100,000 cash. Tomato will distribute its remaining assets, cash, and Avocado stock to its shareholders in exchange for their stock and then liquidate. Given these facts, what type of reorganization would you suggest for Avocado and Tomato? What is the maximum amount Avocado should be willing to pay for the business credits?
Use a "Type A" merger. Value of business credits = $45,728.

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