RSM424H1 Lecture Notes - Lecture 18: Cash Flow
11 Jun 2017
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Chapter 18 business acquisitions and divestitures assets versus shares. The purchaser"s return on investment from a business acquisition results from the future stream of annual profits generated by the acquired business. The amount of pre-tax cash flow that will generated will be identical whether the purchaser acquires the specific assets of the business or the shares of the corporation which houses that business. However, the purchaser"s return on investment is determined not from pre-tax but from after-tax profits. In most situations, the after-tax profits arising from an asset purchase will differ considerably from those arising from a share purchase. When the vendor wishes to minimize tax on the sale and the purchaser wishes to maximize future cca, a conflict occurs. In many cases, purchase and sale agreements avoid the allocation problem by simply listing the assets as a group and providing a total purchase price for that group. Each party can then determine its own allocation.
