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 from the net operating losses, which is $70 million * 36% = $25.2 million.