A decomposition of ROE for Company A and Company B is as follows: Company A Company B FY15 FY14 FY15

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A decomposition of ROE for Company A and Company B is as follows:

Company A

Company B

FY15

FY14

FY15

FY14

ROE

26.46%

18.90%

26.33%

18.90%

Tax burden

0.7

0.75

0.75

0.75

Interest burden

0.9

0.9

0.9

0.9

EBIT margin

7.00%

10.00%

13.00%

10.00%

Asset turnover

1.5

1.4

1.5

1.4

Leverage

4

2

2

2

An analyst ismost likelyto conclude that:

A. Company A’s ROE is higher than Company B’s in FY15, and one explanation consistent with the data is that Company A may have purchased new, more efficient equipment.

B. Company A’s ROE is higher than Company B’s in FY15, and one explanation consistent with the data is that Company A has made a strategic shift to a product mix with higher profit margins.

C. The difference between the two companies’ ROE in FY15 is very small and Company A’s ROE remains similar to Company B’s ROE mainly due to Company A increasing its financial leverage.

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