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Intermediate
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An analyst is comparing the financial statements of two companies in the same industry. Company X has a higher debt-to-equity ratio and a lower interest coverage ratio compared to Company Y. However, Company X also has a higher return on equity (ROE) than Company Y. Which of the following is the most likely explanation for Company X's higher ROE?
a.
Company X's superior operational efficiency and cost management are the primary drivers of its higher ROE, overcoming the impact of its higher debt levels.
b.
Company X's higher ROE is likely due to its stronger market position and pricing power, allowing it to generate higher profits relative to its equity base, irrespective of its debt levels and interest coverage.
c.
Company X's higher financial leverage is contributing to its higher ROE, despite its weaker ability to cover interest expenses.
Intermediate