The question asks what is the impact to the company’s interest coverage ratio by excluding the investment in associates. The answer provided by the curriculum is that it is not affected. As interest coverage = EBIT / interest expense, I understand that the asset “investment in associates” does not affect that equation. However, my line of thinking is that the associated equity income (or lack thereof in this case) would decrease EBIT and therefore the interest coverage ratio. Can anyone explain if I am missing something here?
On a related note, the item set asked a question on impact to net profit margin excluding the investment in associates. The correct answer provided by the curriculum was that NPM will decline because the equity income is no longer recognized. This seems inconsistent so any help here is appreciated. Thanks!
