When Is the Equity Method Used to Account for Long-Term

question 88

Multiple Choice

When is the equity method used to account for long-term investments in common stock?

• A)When the investment is between 20% and 50% of the voting stock,regardless of whether or not significant influence can be achieved.
• B)When the investment is greater than 50% of the voting stock,regardless of whether or not significant influence can be achieved.
• C)When the investment is greater than 50% of the voting stock and significant influence can be achieved.
• D)When the investment is between 20% and 50% of the voting stock and significant influence can be achieved.

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Definitions:

Cost of Equity

The return that investors expect for investing in a company's equity, reflecting the risk of owning equity in the company.

Interest Tax Shield

The tax saving attained by a firm from interest expense.

M&M Proposition II

A theory by Modigliani and Miller that suggests the cost of equity is a linear function of the company's debt/equity ratio, under a no-tax environment.

Financial Risk

The possibility of losing money on an investment or business venture due to various financial factors.