Problem Seven: Consolidation vs. Equity
Company ABC has a large, wholly owned consolidated finance subsidiary. For each of the following ratios, state the effect (higher, lower, or no effect) that consolidation has on the ratio of Company ABC compared to the ratio it would have if it accounted for its finance subsidiary using the equity method. Briefly explain why each effect occurs.
a. Debt/equity ratio
b. Return on assets
c. Times interest earned

Question

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The Answer of Problem Seven: Consolidation vs. Equity
Company ABC has a large, wholly owned consolidated finance subsidiary. For each of the following ratios, state the effect (higher, lower, or no effect) that consolidation has on the ratio of Company ABC compared to the ratio it would have if it accounted for its finance subsidiary using the equity method. Briefly explain why each effect occurs.
a. Debt/equity ratio
b. Return on assets
c. Times interest earned

Problem Seven: Consolidation Vs. Equity