good simple one --------- 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 86.2%. C) The debt/equity ratio is still 100%.
A?
A is my guess as well.
this was a lil tricky ------------- B is correct. The increase in return on plan assets will increase overall assets and equity by $5 million. The increase will also reduce pension expense by $5 million resulting in an increase in net income and retained earnings of $3 million (5 × (1 − 0.40)). Therefore, the new debt/equity ratio is 86.2% (50 / (50 + 5 + 3)).
guys this is a bs problem. Your expected return on plan assets would do nothing to you assets. It is your actual return on plan assets that would increase assets. This question has been discussed many times over before. so because ERPA increased - yes net Income would increase - but that is about it…