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Japanese companies tend to belong to groups keiretsu and to hold shares of one another Because these cross holdings are minority interest they tend not to be consolidated in published financial

Japanese companies tend to belong to groups (keiretsu) and to hold shares of one another. Because these cross-holdings are minority interest, they tend not to be consolidated in published financial statements. To study the impact of this tradition on published earnings, consider the following simplified example: Company A owns 10 percent of Company B; the initial investment was 10 million yen. Company B owns 20 percent of Company A; the initial investment was also 10 million yen. Both companies value their minority interests at historical cost. The annual net income of Company A was 10 million yen. The annual net income of Company B was 30 million yen. Assume that the two companies do not pay any dividends. The current stock market values are 200 million yen for Company A and 450 million yen for Company B. a. Restate the earnings of the two companies, using the equity method of consolidation. Remember that the share of the minority-interest earning is consolidated on a one-line basis, proportionate to the share of equity owned by the parent. b. Calculate the P/E ratios, based on nonconsolidated and consolidated earnings. How does the nonconsolidation of earnings affect the P/E ratios? View Solution:
Japanese companies tend to belong to groups keiretsu and to

 

May 22 2020 View more View Less

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