Deferred tax liability treated as eqy

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jgrandits

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When a firm has a DTL and expecting decline in capex why is the present value treated as a liability and remainder treated as equity vs a firm with continued capex growth that can treat the entire amount as eqy?
here’s the question that prompted the post:
An analyst is comparing a firm to its competitors. The firm has a deferred tax
liability and is expected to have capital expenditures decline in the 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.
e. The present value should be treated as a liability with the remainder being
treated as equity.
D. It should be considered neither a liability nor equity.
thanks, John
 
If the firm is expected to continue growing it will likely continue to have accelerated depreciation for tax purposes and therefore have a growing DTL. Individual DTLs will reverse, but as a whole the DTL for the company will not. Because of this it will always have that cash available to use and not have to recognize/pay those deferred taxes and is treated as equity for analysis purposes.
On which page in the CFAI text or Schweser text does it say the PV of the DTL is treated as a liability and the remainder equity? I don’t remember reading that (although now that I’m reviewing it seems there’s a lot I don’t remember!), but I think when I came across this question I decided that answer is just a distractor.
Hopefully that helps
 
I think that question is pretty confusing. A decline in Capex? Replacement or strategic? Decline from level expenditures or from increasing expenditures? I cant imagine a question with that many unknowns being asked seriously. Is the answer C by the way, or are you asking why this would occur?
 
yeah, answer is C. question from ‘08 schweser material
The firm has a deferred tax liabiliry and is expected to have capital expenditures decline
in the future. The present value should be treated as a liabiliry wirh the remainder
being rreared as equity.
 
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