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question one you are newly appointed cfo publically traded multinational company your career
Question One: You are the newly appointed CFO of a publically traded, multinational company. Your career has been spent mostly in finance and you have a limited tax background. The CEO of the company advises that one of your tax goals will be to manage (and hopefully lower) the company’s effective tax rate. You meet with several members of your tax organization. They advise that they have been working on several tax savings/deferral strategies. Those strategies are as follows: 1- Certain capital investment expenditures will be depreciated over a life of 5 years for tax purposes instead of 15 years as done in the past. The staff thinks a good argument can be made that these expenditures qualify for a 5 year depreciable life although the matter is not entirely free from doubt. The staff believes the NPV tax savings will be around $10 million. 2- The company will begin to use foreign incorporated subsidiaries to conduct its international operations. Under U.S tax laws, the dividends of those subsidiaries will not be taxed unless/until a dividend is declared and paid. Answer the following questions based on the above: 1- Explain the meaning of an effective tax rate. How is it calculated? How do external investors use the effective tax rate to measure a company’s financial performance? 2- Which, if any (or both), of the two tax planning ideas will impact the effective tax rate? Explain. 3- If the company were to implement the first planning idea, what FIN 48 issues would you need to address? 4- If the second planning idea were to be implemented, what questions would you need to address based on your understating of APB Opinion 23. Question Two: One of your firm’s clients, Brand Names, Inc., holds two businesses. Business one is a sporting goods store operating in Canton, Ohio. Business two is a large restaurant/sports bar located in downtown Cleveland. Both businesses doing exceptionally well since started up in 2001. The shareholders in Brand Names are Smith and Jones with each owning 50% of the stock. Smith is of the view that Brand Names needs to secure capital to open another sporting goods store in the growing Westlake/Rocky River area, but Jones is adamant that another sports bar will do exceptionally well in that area. He believes Dick’s sporting Goods already is saturating the sporting goods store market in the area. Because of these and other disagreements they are having over the management of Brand Names, they ask whether there is any tax efficient manner is which Smith may take over and own the sporting goods store outright and jones the restaurant so that each can build their own growth around those activities. Please describe the tax efficient structure you will advice to them and describe the requirements that will need to be satisfied in order to implement it. Question Three: Anaconda Corporation decides to acquire Monroe Corporation. Monroe is approximately half the size of Anaconda based on market valuations of the two firms. Upon the advice of lawyers, the acquisition will be made as a statutory merger where Anaconda will acquire shares of Monroe for a combination of cash and Anaconda common stock. The aggregate purchase price will be $14 billion. You are the lead accountant for Anaconda responsible for properly accounting for this transaction. You are advised of the following matters by your due diligence team: The fair market value of Monroe’s assets is $13 billion (cash, receivables, inventory, PP&E, and land) Monroe has liabilities on its balance sheet of $3 billion (accounts payable, and bonds payable) The tax basis of Monroe’s assets is $2 billion. You also learn that Monroe has $1 billion of net operating losses. Tax rate %5 Please provide your analysis for the following: 1- if the transaction were to be structured as a statutory merger and qualify as a reorganization for US tax purposes, how may the mix of merger consideration between cash and Anaconda common stock be structured (i.e., what are the parameters of the permitted mix of the $14 billion of consideration)? 2- Assume that Anaconda will pay the entire $14 billion of merger consideration in the form of Anaconda common stock. Based on the due diligence information, what will be the initial accounting entry to record the acquisition of Monroe on Anaconda’s accounting records? Question Four: Describe the three primary methods used for preparing a valuation. In addition, please provide advice in the following situation: Vincenzo owns %15 of the common stock of a small corporation. The remaining %85 of the stock is held by various unrelated to Vincenzo and none of the other shareholders own more than %15 of the stock (the ownerships range from %5 to %15). The business is a successful venture that grows trees and shrubbery. Vincenzo believes the business is worth about $5 million so his shares might be worth %15 of that amount. An unrelated party offered Vincenzo $800,000 for his shares. How would you approach the valuation so as to advice Vincenzo as to the value of his shares? Question Five: You are a lead accountant for Xero Corporation. Xero owns %100 of the stock of a subsidiary, Minus, that Xero would like to sell. The potential buyer for the Minus stock advices that it will offer $10 million for all Minus stock only if the transaction can be structured as a 338(h)(10) transaction. Your manager asks you to explain what a 338(h)(10) election is to her. She also asks you to explain what information is relevant for purposes of deciding whether Xero will be willing to make the 338(h)(10) election?