CFA Dummy Inc. reported the following 2008 year-end data: Net income $45 million Dividends $10 million Total long-term liabilities $100 million Total shareholders equity $200 million Effective tax rate 40 percent Following the release of this data, CFA Dummy Inc. discovered that the service and interest costs related to their pension fund accounting had been miscalculated. The new estimates 20 million higher than the original estimates. What is the impact on the debt to equity ratio? The new debt/equity ratio is:
NI goes down to 33, which makes equity go down to 200-12=188. new d/e ratio will be = 100/188 = .53
Net Income = 45 - 20(1-.40) = 33 LT Liabilities = 100 + (20(1-.40)*** = 112 SH Equity = 200 - 20(1-.40) = 188 ***PBO increases from service cost and interest expense Debt / Equity = 112 / 188 = 60%
wow…completely forgot about LTL…thanks
Bhill you are right. Just remember the balance sheet has to balance, when making adjustments. If you are decreasing Equity, then you either have to increase liabilities or decrease the assets side.
You bet. I’m an accountant (though work in M&A), so hoping for lots of questions like these on Sat!