Investments in Associates - Change on Leverage? question, existing, investment, Investment, change

parott

Pertinent Info:

Total Assets: 56,396
Investment in Associate: 5,504
Stockholder's Equity: 30,371

We're adjusting ratios for the effects of removing an investment in an associate accounted for using the equity method.

My question, if existing Leverage (Assets/Equity) was 1.86, wouldn't we need to remove the associate asset from assets and equity, thereby increasing leverage to 2.04?

Schweser says Leverage doesn't change.

firat

Wouldn't it be removing investment in associates and adding the amount to cash. As if you have sold off the investment.

So total assets and equity will not change.

tikfed

I vaguely recall this question - if I'm not mistaken, you've left out a few key details. In this case, I believe the adjustment to remove the investment in an associate is being made because the analyst had determined that comparable industry participants account for similar investments as available-for-sale. So while you're removing the investment in an associate from both assets and equity ... equity will be increased by any unrealized gain on the investment.

Though, I could be remembering wrong...

Given your basic set of facts - if you are simply "removing" an investment altogether, and not accounting for it some other way (which begs the question... why not?) - then your adjustment would be correct - reduce assets and equity.

giorgio10

So, looks like the answer from source is correct. TA/E does not change.