Source: Schweser
The solution to the question below is C, but I’m having a hard time understanding why it’s a higher ROI under the equity method. Can someone walkthrough an example of this? A is incorrect because net income is the same regardless of accounting method. B is incorrect because the debt coverage ratio is unaffected.
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SUP DUDE
Can you provide some more context? Like where in schweser is this question
Equity method = incorporate part of income in p&l
Passive does not. Only change in fair value.
Since balance sheet value is equal. ROI in equity method is higher.
The values on the balance sheet are not necessarily equal.
The value under investment in financial assets is the fair market value of the stock.
The value under the equity method is the purchase price plus the proportionate share of net income less excess depreciation/amortization less dividends received.
There’s no reason to believe that those two values will be the same.