- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 10. Intercorporate Investments
- Subject 5. Business Combinations
CFA Practice Question
The pooling method results in ______ than the acquisition method.
II. Higher ROA.
III. Lower profit margin.
IV. Lower ROE.
I. Greater depreciation expense.
II. Higher ROA.
III. Lower profit margin.
IV. Lower ROE.
Correct Answer: II only
User Contributed Comments 5
| User | Comment |
|---|---|
| vi2009 | That is why managers love it! |
| czar | Why not IV? |
| arudkov | i think ROE ll be the same. |
| endurance | pooling of interest method recorded assets and liabilities at book values due to the view of continuity of ownership. This means a lower asset base and higher ROA |
| davidt876 | you really have to assume that fair value of the assets will be higher than their book value (which is usually a safe bet) assuming the above czar - not IV because we (assume that we) increased the value of the assets by FV'ing them in the acquisition method, and higher depreciation means lower earnings. also when we increase the BV of assets to their FV, we're simultaneously increasing the acquired company's equity (A=L+E). the combination of lower earnings and higher equity means acquisition produces a lower ROE than pooling |