Probably a silly question but my head just can’t wrap around the following question from Schweser note:
A company accounts for its investment in a subsidiary using the equity method. The reported net profit margin is 14%. An analyst adjusts the financials and determines that the company’s own net profit margin is 8% while the subsidiary’s profit margin is 10%. The netprofit margin based on consolidation would most likely be:
A. less than 8%.
B. more than 14%.
C. between 8% and 14%.
The Answer is C because The equity method typically yields a higher measure of net profit margin.Consolidation is most likely to result in a net profit margin somewhere between the profit margins of the two entities.
I’m not sure if I misinterpreted the question but I assume ‘Consolidation’ refers to Acqusition method right? And under all these methods, the Net Income remains the same. However, the revenue is the smallest under the Equity method rwhich means Net Profit Margin (NI/Revenue) should be the greatest (in this case, it’s 8%).
So based on consolidation method this would only increase the Revenue and thus make the NPM smaller (less than 8%). So why it’s not A?
Any help is appreciated!