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5. Lava Lamps Inc. had $800 million in earnings before interest and taxes last year. It has just acquired a 50% stake in General Lamps Inc., which had $400 million in earnings before interest and taxes last year. Because Lava Lamps has a majority active stake, it has been asked to consolidate last year’s income statements for the two firms. What earnings before interest and taxes would you see in the consolidated statement?

Answer: Lava lamps will show 1200 million as EBIT. However, it would show 16% [ 200 out of 400 of General lamps / 1200] as minority interest of General lamps in the income statement.

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$1200 million of EBIT is accurate since companies have to fully consolidate their subsidiaries earnings.

$200 million in minority income is also accurate since it reflects the portion of the subsidiaries income that the parent is not entitled to.

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