The Albatross Co. has accumulated net operating losses of $70 million and is likely to enter bankruptcy. The Zephyr Co. has earnings of $200 million and is in the 36% marginal tax bracket. Zephyr is considering buying Albatross and liquidating the company and retaining a few of the assets. What is the minimum value of Albatross to Zephyr?
A) $25.2 million.
B) $72.0 million.
C) $70.0 million.
D) Not enough information to calculate.

Question

Quizplus · Accepted Answer

The minimum value of Albatross to Zephyr is the tax shield that Zephyr can gain from Albatross's net operating losses. Since Zephyr is in the 36% tax bracket, the value of the tax shield is 36% of $70 million, which is $25.2 million.