The DAB Corp.has unfortunately accumulated net operating losses of $70 million and is likely to go bankrupt.The CLC Corp.has earnings of $200 million and is in the 36% marginal tax bracket.CLC is considering buying DAB and liquidating the company and retaining a few of the assets.What is the minimum value of DAB to CLC?
A)$25.2 million
B)$70.0 million
C)$72.0 million
D)There is insufficient information provided.

Question

Quizplus · Accepted Answer

The minimum value of DAB to CLC can be calculated by considering the tax benefits of acquiring a company with net operating losses. CLC can use DAB's net operating losses to offset their taxable income, resulting in a lower tax bill. This tax benefit is equal to the net operating losses multiplied by the marginal tax rate, which is $70 million x 36% = $25.2 million. Therefore, the minimum value of DAB to CLC would be $25.2 million, which is option A.