interest cover ratio --quick!!

I think i just blanked out for a moment and this is so simple… But for EBIT/interest expense under consolidation is lower right? consolidation = higher liabilities = higher interest expense. does anything happen to EBIT? i know net income stays the same.

EBIT/interest should be the same. Consolidation results in higher depreciation, but NI is the same as versus equity.

R u sure the higher depreciation offsets the higher interest expense exactly and EBIT/interest stays the same?

NI and Equity are the same under both methods, 100% sure. By induction I can infer that since the only components of EBIT not included in NI are interest and taxes the depreciation shouldn’t be a factor.

This question is interesting. Even though NI is the same, I’d say that EBIT/interest expense should be generally lower under the consolidation method

I agree that it should be lower, interest expense will be higher due to the inclusion of the liabilities of the subsidiary are included

It should be lower in equity: EBIT = Operating Income = Rev - Operating Expenses. For consolidation, you are combining revenues and expenses to get to Op Exp. In the case of Equity, you are only pulling the revenues & expenses for the parent which should result in a lower EBIT. In terms of the denominator (Int Exp)…it will be more for a consolidated company, but not to the extent of the increases in revenues and expenses. -> I have a hard time convincing myself about this but I’m going to stick to it!

You are talking about proportionate consolidation Under Equity method, only the portion of subsidiary’s NI is added to consolidated NI. You DON"T mess with the top line items like sales or op. expenses.

I tihnk its lower too. interest expense is def higher under consolidation vs equity. EBIT if anything should prob be lower if you have more depreciation under consolidation? but i htink the interest expense offsets it by much more. I’m sticking iwth lower if i see this on the exam unless someone tells me they know for sure im completely wrong.

Agreed on not messing top line items such as Sales or Operating expenses in Equity. I think my use of the word ‘parent’ was confusing.