The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward that King Solomon Mining can use over the next two years ($200,000 per year).
If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on its cash-flow benefit over the next 20 years?

Question

Quizplus · Accepted Answer

The Answer of The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward that King Solomon Mining can use over the next two years ($200,000 per year).
If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on its cash-flow benefit over the next 20 years?

The King Solomon Mining Company Is Contemplating a Cash Tender