CFA Practice Question

CFA Practice Question

A firm has a DTL of $5,000. An analyst expects the DTL to reverse in 7 years. The discount rate is 6% per year. The analyst should increase equity by:
A. $1,675
B. $5,000
C. $3,325
Explanation: Present value to firm = Book Value of DTL - Discounted Value of Tax paid at reversal = $5,000 - ($5,000/1.06^7) = $1,675.

User Contributed Comments 2

User Comment
jpducros Do we really have to discount the future Tax payable ? and consequently to undiscount it every year !!
Riley85 You are not allowed to discount DTL or DTA under IFRS or US GAAP. However you should do in your own equity analysis to get what the liability is worth now instead of 7 years later. Way to go analystnotes.
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