3. The following is a decomposition of the Return on Equity (ROE) for Company A and Company B:

	Company A		Company B
	2020	2019	2020	2019
ROE	26.46%	18.90%	26.33%	18.90%
Tax burden	0.70	0.75	0.75	0.75
Interest burden	0.90	0.90	0.90	0.90
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

Required:

1. As a financial analyst what is your conclusion about the various components of the ROE for company A and Company B?

(20)

2. Explain how a company can make an effective use of leverage.

(10)

3. What does a high and low P/E ratio mean? Support your answer with numerical examples.

(10)

4. Discuss Altmans (1968) model that can be used to quantify the likelihood that a company will default on its debt and/or declare bankruptcy.

(10)

(50)