leadcfa

Coastal Drilling Corp (CDC) reported the following year-end data:

EBIT	$23 million
EBT	$20 million
Effective tax rate	40 percent

CDC reported in the footnotes to its financial statements that it had increased the expected return on pension plan assets assumption which resulted in an increase of EBIT of $2 million. Analyst Wanda Brunner, CFA, thinks this change in assumptions is unfounded and removes the $2 million increase in EBIT. Which of the following is closest to the tax burden ratio after adjustment?

A) 61.9%.

B) 60.0%.

C) 55.6%.

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Tax burden = NI/EBT or 1 - the effective tax rate. The increase in the return on pension plan assets assumption increased EBIT, EBT, Income Taxes, and Net Income from what it would have been. Removing $2 million from the reported numbers will reduce EBIT, EBT, Income Taxes, and Net Income. However, the tax burden ratio will still be 1 - the effective tax rate.