# Pension - Textbook question - Question 32 on page 108:

Question 32 on page 108:

Based on Exhibits 2 and 3, as well as Holmstead’s assumption about future health care inflation, the debt-to-equity ratio calculated by Rickards for XYZ should be closest to:
A 2.69.
B 2.71.
C 2.73.

Exhibit 3 shows 100 bp increase would result in Benefit obligation change of + \$93.

Answer is:C is correct. To calculate the debt-to-equity ratio, both liabilities and total equity need to be adjusted for the estimated impact of a 100-bp increase in health care costs. The proposed increase in health care costs will increase total liabilities and decrease equity by the same amount. Consequently, the debt-to-equity ratio changes as follows:
Sensitivity of benefit obligation to 100-bp increase = \$93
Adjusted liabilities = \$17,560 + \$93 = \$17,653
Adjusted equity = \$6,570 – \$93 = \$6,477
Adjusted debt-to-equity ratio = \$17,653/\$6,477 = 2.7255 ≈ 2.73
Consequently, a 100-bp increase in health care costs increases the debt-to-equity ratio to approximately 2.73.

I am confused by why the equity is adjusted by \$93 please, will this be impacted by Retained Earning via income statement please?

Second, why dont we include the impact of \$12 please? as it is change in benefit expenses, which shall impact the retained earning then equity?