# Long-term Debt to Total Asset Ratio - Adjustments

Schewer Question ID#: 9078 Balance Sheet (in \$ millions) Cash 35 Accounts Payable 60 Accounts Receivable 75 Long Term Debt 120 Inventory 190 Common Stock 360 Equipment 400 Retained Earnings 230 Real Estate 50 Goodwill 20 Inventory is valued under the Last In, First Out (LIFO) cost flow assumption. The LIFO reserve was \$50 million on January 1, 2004 and \$60 million on December 31, 2004. The firm has operating leases with a present value of \$100 million. Rent payments of \$20 million equate to \$10 million interest expense plus \$10 million depreciation expense. A class action lawsuit has been filed against Bingaman for environmental contamination of a wildlife reserve. According to Bingaman’s attorney’s, the likely outcome is a \$12,000,000 judgment adverse to Bingaman in early 2006. Because of an increase in market interest rates during the year, the market value of Bingaman’s long-term debt has changed by \$15 million. Goodwill is from previous acquisitions. Schindler has determined that Bingaman’s marginal tax rate is 40%, and he assumes that that inflation will average 2.5% per year over the foreseeable future. Question: Statement 4: The long-term debt to total asset ratio will increase after restating the financials? Answer: Statement 4 is correct. Total assets before restatement = \$770 million; after restatement = \$910 million. Long-term debt before restatement = \$120; after restatement = \$217. Long-term debt to total assets before restatement = 120 / 770 = 0.156 or 15.6%; after restatement = 217 / 910 = 0.238 or 23.8%. Summary of change in total assets: prior assets + LIFO reserve + PV of leases - goodwill = \$770 + \$60 + \$100 - \$20 = \$910 million. Summary of change in LT debt: prior LT debt + PV of leases + litigation exposure - change in market value of debt = \$120 + \$100 + \$12 - \$15 = \$217 million. MY ISSUE: WHY DOES LT DEBT INCLUDE THE NEAR-TERM ENVIRONMENTAL OBLIGATION - SHOULDN’T THAT BE INCLUDED IN CURRENT LIABILITY, NOT LONG-TERM? Doesn’t affect True/False answer, but it does change the calc.

A class action lawsuit has been filed against Bingaman for environmental contamination of a wildlife reserve. According to Bingaman’s attorney’s, the likely outcome is a \$12,000,000 judgment adverse to Bingaman in early 2006. it says 2006 and balance sheet is of 2004. Anything more than a year is considered as a LTD.

nittany222 Wrote: > A class action lawsuit has been filed against > Bingaman for environmental contamination of a > wildlife reserve. According to Bingaman’s > attorney’s, the likely outcome is a \$12,000,000 > judgment adverse to Bingaman in early 2006. > MY ISSUE: WHY DOES LT DEBT INCLUDE THE NEAR-TERM > ENVIRONMENTAL OBLIGATION - SHOULDN’T THAT BE > INCLUDED IN CURRENT LIABILITY, NOT LONG-TERM? it’s not a current liability because it’s not due until next year.

Good eyes - thank you.