27. Measuring leverage (S29.4) Take another look at Geomorph Trading’s balance sheet in Problem 9 and consider the following additional information:

Current Assets Current Liabilities Other Liabilities Cash $15 Payables $35 Deferred tax $32 Inventories 35 Taxes due 10 Unfunded pensions 22 Receivables 50 Bank loan 15 R&R reserve 16

$100 $60 $70 The “R&R reserve” covers the future costs of removal of an oil pipeline and environmental restoration of the pipeline route.

There are many ways to calculate a debt ratio for Geomorph. Suppose you are evaluating the safety of Geomorph’s debt and want a debt ratio for comparison with the ratios of other companies in the same industry. Would you calculate the ratio in terms of total liabilities or total capitalization? What would you include in debt—the bank loan, the deferred tax account, the R&R reserve, the unfunded pension liability? Explain the pros and cons of these choices.