Question

a)In corporate spheres, the existence of corporate taxes has led to the risk of bankruptcy. Using appropriate theories validate this assertion.

b) Mergers and acquisitions are evaluated beforehand to determine the net economic advantage they create and this forms a basis for a decision on whether to approve or disapprove any such business combination. However, there are several overriding factors that corporate leaders, investment bankers and other stakeholders must consider beyond the mere synergies that accompany mergers and acquisitions. Evaluate these factors showing how they may alter a decision that appears to be persuasive at face value. (20 Marks

Answer 1

Solution for (a) Marks 10

Issue

In corporate spheres, the existence of corporate taxes has led to the risk of bankruptcy. Using appropriate theories validate this assertion.

Law

A corporate tax, also called corporation tax or company tax, is a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels.

Application

Let us make some assumption in regards ebitda (Earnings before interest, taxes, depreciation and amortization) to ascertain our claim of risk to existence / bankruptcy.

ebitda

ebitda	1,000,000
Interest	100,000
Taxes	500,000
Depreciation	400,000
Amortization	400,000
Net Income	-400,000

With above assumption it is clear that In Corporate is on verge of sure risk of existence / bankruptcy. Present market condition can only lead to increase in

Depreciation as in compare to budgeted.

Interest rate will also increase due to loss in goodwill.

However only thing which can save In corporate is complete relief from taxes.

Conclusion

Taking above application into our consideration we can file for relief petition with tax department.

Solution for (b) Marks 20

Below are some factor taken into consideration for prospective merger & accusations. However, there are some cases where very attractive company at persuasive at face value fail after certain test.

1. The right partner

Step one is choosing a suitable partner: The wrong choice of partner can lead to difficult negotiations and loss of information, and occasionally to nothing happening at all.
Wrong partnership can lead disruptive in management decision

2. Trust between the parties

Mutual trust between the management of both parties ensures that negotiations run smoothly, leading to a higher chance of the deal being brought to a favourable conclusion.

Untrusted partnership can lead to huge losses, example (financial, goodwill, CSR (Company Social Responsibility) Standing. There cases company’s where shut due to unhygienic processes, causes loss to environment, health etc.      

3. Due diligence en good valuation

In addition to the factors mentioned above, the quality of the valuation after thorough due diligence is important. Due diligence in mergers and acquisitions is an in-depth study of the history, mission, values, culture and financial reports of an organization and is necessary to obtain an adequate valuation.

This is the most important part. Poor valuation can result in an inflated price, which will make the merger or acquisition look like a disaster in hindsight. Example Lehman Brother Case. Which has forced government to enforced more resilient step in regards to audits, internal controls etc.

4. Experience from previous mergers and acquisitions

Experience from previous mergers and acquisitions can play a huge role, according to some economists, while others contend that it has no effect whatsoever. What really matters is that the management team learns from previous experiences – experience alone doesn’t increase the chance of success.

A previous failed acquisition, for example, can make management wary of providing a new partner with information in a fresh set of negotiations.