Coastal Drilling Corp (CDC) reported the following year-end data: Net income $23 million Total liabilities $50 million Total shareholder’s equity $50 million Effective tax rate 40 percent CDC also reported that it had changed the expected return on plan assets assumption which resulted in an increased return on plan assets of $5 million. This change resulted in an increase in the market-related value of plan assets with no long-term effect on the income statement. What is the impact on the debt/equity ratio? A) The new debt/equity ratio is 90.9%. B) The new debt/equity ratio is 94.3%. C) The new debt/equity ratio is 86.2%. D) The debt/equity ratio is still 100%.
http://www.analystforum.com/phorums/read.php?12,726173,726173#msg-726173 and I think there’s another thread even before that one…try the search option!
If you increase the expected return on plan assets assumption by $5Ml, this will affect the following: Pension Expense = Pension Cost + Interest cost - Expected return on plan asset So, Pension Expense will be lower and, as a consequence, net income will be higher by $5Ml. So your Equity will be 50 (old) + 5 (new earnings) = 55 And so: 50/55=90.90 So it’s A!
I’m afraid you need to take your answer Jpalu and multiply by the comedy factor! Makes no sense to me, but it’s 86.2%: 5 increase in assets + 3 increase in NI (5*1-.4) which will be added to equity and RE. 50/(50+5+3) = 86.2%