My question is prompted specifically from question # 26 in Reading 21 of the CFAI curriculum: “NinMount’s long-term debt/equity ratio on Dec 31/07 most likely will be highest if the results of the merger are reported using the” a) equity method b) consolidation method c) prportionate consolidation method The correct answer is a). I understand that the additional debt from consolidation would increase the numerator, but in the answer, the denominator, equity, is unchanged. Why is this so? Would equity not change by the net assets being consolidated in the financials? Many thanks
In correction to the above post, I meant to type b) as the correct answer. My question remains unchanged though.
There is no change in equity (except if the parent issued stock for the stock of the acquired company). Other than this instance, the equity of the acquired is actually removed by parent’s investment.
Ok, that’s what I expected. Thanks for confirming.