When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, leverage measures for a firm using proportionate consolidation will appear: A) less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. B) less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method. C) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. Your answer: B was incorrect. The correct answer was C) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. All else being equal, leverage measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the value of the liabilities on the balance sheet, while the level of book equity remains the same. comment: consolidated method, same equity, more debt/liablity, higher leverage-- less favorable?
Answer is C In general, Equity method reports best ratios, acquisition or consolidation reports worse ratios, with prop consolidation somewher in between Equity in all three will be the same (although for acquisition there may be minority interest added which would make it a little higher). However, debt under acquisition refelects all of the subsidiary’s debt, while prop consolidation only reflects a portion of it. So D/E will be lower (lower numerator, approx same denominator) than the acquisition method. Equity method wont show any of the debt and will have the same equity, so it is the lowest ratio (strongest ratio)
oh more favorable THAN, thought it was more favorable FOR. i keep reading the questions wrong