On December 31, 20X0, Company X has engaged in off-balance-sheet financing in the form of take-or-pay agreements of 300,000 for the next three years. The company's incremental cost of borrowing is 6%. A financial analyst has been assigned the task of determining the non-GAAP effects of the take-or-pay agreements on the company's 20X0 financial statements (ratios). The company's (unadjusted) GAAP balance sheet as of December 31, 20X0, is as follows: Balance Sheet Cash 150,000 Inventory 370,000 Fixed Assets 630,000 Total Assets 1,150,000 Payables 120,000 Long-Term Debt 470,000 Common Equity 560,000 Total Liabilities & Common Equity $1,150,000 The impact of the analyst’s adjustments will most likely result in adjusted current and total debt-to-equity ratios that are closest to: Current Total Debt-to-Equity Ratio Ratio a. 1.3x 105% b. 2.0x 105% c. 2.0x 249% d. 1.3x 249% - Dinesh S
Before Adjustment Current Ratio = 150+370 / 120 = 4.33 TOTAL D/E = 120+470/560 = 105% Take or pay agrrements r usually adjusted by taking the present value of the amount (300k). So, the PV is 283.02. Therefore, answer A seems likely. Any thoughts?
300000/ 1.06^3 = 251885 this is the pv of the contracrts this gets added to both assets and liabilities total d/e 590000/560000 = 105% after adjustment d/e 841885/560000 = 150.3 % current ratio 570000/520000 = 4.33 do we add this to curent assets and liabilities? i first thought no… but since none of the answers are 4.33 i guess we have to… so i have no idea what the answer is… on the exam. i would have to choose between c & d… b/c 105% is the origional d/e w/ out adjustment and the question asks for an adjustment… so i am going to go w/ C…