Referring to CFAI reading 24, practice problem 18: Question says- a significant portion of PDQ’s net income is explained by its 20% minority interest in Astana Systems. How much of PDQ’s value can be explained by its equity stake in Astana? PDQ market cap = 563,355 Astana market cap = 298,350 The answer has 0.2 x 298,350 = 59,670 (amount explained by Astana). Why are we using market cap here? The question mentions net income, so should we be looking at the income statement, not market cap, to determine value?
Value = market cap.
100% of Astana = 298,350 so 20% = 0.2 x 298,350.
- Why is value = market cap here? 2. Under the equity method, we don’t combine market caps, so why do we need to remove it?
20% of the net income just tells you that PDQ acquired 20% of Astana.
Your investment in Astana should equal to 20% of Astana’s market value (because you pay market value).
thanks