Chapter 16, Problem 16.9BYP

Judgment Case 16–9

Analyzing the effect of deferred tax liabilities on firm risk; Macy’s, Inc.

• LO16–8

Real World Financials

The following is a portion of the balance sheets of Macy’s, Inc. for the years ended January 30, 2016 and January 31, 2015:

Macy’s debt to equity ratio for the year ended January 30, 2016, was 3.84, calculated as ($20,576 – 4,253) ÷ 4,253. Some analysts argue that long-term deferred tax liabilities should be excluded from liabilities when computing the debt to equity ratio.

Required:

1. What is the rationale for the argument that long-term deferred tax liabilities should be excluded from liabilities when computing the debt to equity ratio?

2. What would be the effect on Macy’s debt to equity ratio of excluding deferred tax liabilities from its calculation? What would be the percentage change?

3. What might be the rationale for not excluding long-term deferred tax liabilities from liabilities when computing the debt to equity ratio?