Question #13
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 6
Status: Correct
Correct Answer: A
Question
When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, leverage measures for a firm using consolidation will appear:
Answer Choices:
A. less favorable than those for a comparable firm using the equity method
B. more favorable than those for a comparable firm using the equity method
C. more or less favorable depending on the leverage of the investee company
Explanation
Under consolidation, the debt of the subsidiary is included in the parent company balance
sheet. Parent company's equity is also increased due to minority interest. The impact on
leverage will depend on the leverage employed by the subsidiary.