|Author||Topic: a question about deferred tax liability|
|Friends, please help me understand the question.
An analyst is comparing a firm to its competitors. The firm has a deferred tax liability that results from accelerated depreciation for tax purposes. The firm is expected to continue to grow in the forseeable future. How should the liability be treated for analysis purposes?
A- It should be treated as equity at its full value.
B-It should be treated as a liability at its full value.
C- The present value should be treated as a liability with the remainder being treated as equity.
It was even more difficult for me as I didn’t understand the options. Thanks!
|Answer should B. Basically, if the company is expected to grow in the future, it will be able to earn enough to pay its liabilities. The question implies that the company’s deferred tax liabilities will neither grow nor remain on the balance sheet for the foreseeable future. If this were the case, then the deferred tax liability would actually be “equity-like” and the analyst would have to make the adjustment to equity (option “a”).
I have seen a couple of different variations on this question, and they usually try to throw you off with the present value stuff - DTAs and DTLs do not involve any PV calculations. PV should be used only for finance leases, from what I remember.
Hope this helps.
|I feel the answer would be A. Although it is a bit subjective, still the question mentions that the company is expected to grow in the forseeable future and assuming it will be significant capex, the DTL figure might not reverse immediately. Hence it is safe to assume it as a component of networth.|