Take or Pay

This has prob. been aswered before, but the CFA text states the PV should be aded back to debt for analysis purpose. Schweser states, it should be added back to assets and debt. Which is correct? I would think that it should be added back to debt becasue you made a commitment to buy materials for a given amount of time which will increase the D/E Ratio and also decreae interest cov. ratio. But, if it was added back to assets why wouldn’t if effect equity and therfore decrease the D/E Ratio. Can someone please explain? What am I missing of the asset side?

If liabilities go up and equity remains the same, then assets have to go up- Assets = Liabilities + Equity Whatever you committed to buy will appear in your books as an asset.