Essay
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 $162,500 in after-tax cash flow (after tax income plus CCA)each year for the next 20 years.In addition,Roanoke has a $630,000 tax loss carry-forward that King Solomon Mining can use over the next two years ($315,000 per year).
If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%,what is the maximum cash price it should be willing to pay to acquire Roanoke?
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Present value of after-tax cash flows:
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