Hi there, 2 quick questions: 1) The firm has a deferred tax liability and is expected to continue to grow in the foreseeable future. The liability should be treated as equity at iTs full value. 2) The firm has a deferred tax liability and is expected to have capital expenditures decline in the future. The present value should be treated as a liability wirh the remainder being treared as equity. Can somebody explain why? Thanks!
Deferred taxes are caused by temporary differences and this depends on the whether the effect will reserve itself. In case 1) given that the liability is expected to continue to grow… then it will most likely never reverse and therefore should be treated as equity. It would be more of a permanent difference. In case 2) the difference is clearly temporary and therefore the DTL will reverse and should be treated as a liability. Hope it helps.