A company reports DTA of $300 million and DTL of $200 million on its balance sheet for the year
ended December 2009. Tax rates from 2010 onward are brought down from 40% to 30%. In response to
this change in tax rates, the decrease in the company’s shareholders’ equity is closest to:
A. $25 million.
B. $10 million.
C. $75 million.
Answer is A. Can somebody explain this?
See, here DTA and DTL are calculated on 40%
So we have to recalculate by 30%
For DTA we have to calculate by 30% i.e
750*30%=225 this means DTA has decreased so this will decrease equity by 300-225= (-75)
And same for DTL
This will increase equity by 200-150=50
So net equity will decrease by -75+50=(-25)
thank you!
You can calculate it from the difference of DTA and DTL which is $100 million
which is equal to the tax rate of 40% but due to decrease in tax rate value of asset decrease,
Now the value of DTA = (100/.4)*.3 = $ 75 million
Value to DTA reduce from $100 to $75 million therefore loss of asset is $ 25 million.
I hope this will help.
thank you!