Equity Method: Removing the effects of the income reported under the equity method

• For a firm that reports equity income as non-operating income (not included in EBIT, but in Net Income)
• Removing the
• equity income from I/S (i.e. net income)
• equity asset on the B/S

Equity Method: Removing the effects of the income reported under the equity method

items	increase/ decrease/ unchanged
Equity	↓
Assets	↓
Asset Turnover Ratio (=Revenue/Assets)	→/↓ = ↑
Tax Burden (= Net Income / EBT)	↓/→ = ↓
Interest Expense	→
Operating Earnings; EBIT	→
Interest Coverage Ratio (=EBIT/Interest Expense)	→/→ = →

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(Question)
For a firm that reports equity income as non-operating icome (NOT included in EBIT), removing equity income from the financial statements would most likely result in:

A. an increase in the tax burden term in the extended Du Pont decomposition of ROE.
B. an increase in the asset turnover ratio.
C. a decrease in the interest coverage ratio.


Answer: B