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Answer: Company 3
Solvency refers to a company's ability to meet its long-term debt obligations, which can be assessed using leverage and coverage ratios. Key observations from the data are: 1. **Leverage Ratios**: - **Debt-to-Assets Ratio**: - Company 1: 0.20 - Company 2: 0.25 - Company 3: 0.20 - **Debt-to-Equity Ratio**: - Company 1: 0.25 - Company 2: 0.33 - Company 3: 0.25 - **Financial Leverage Ratio**: - Company 1: 1.25 - Company 2: 1.33 - Company 3: 1.25 Company 1 and Company 3 exhibit the lowest leverage ratios, indicating lower financial risk. 2. **Interest Coverage Ratio**: - Company 1: 2.00 - Company 2: 2.50 - Company 3: 3.00 Company 3 has the highest interest coverage ratio, reflecting its superior ability to cover interest payments. **Conclusion**: While both Company 1 and Company 3 have low leverage ratios, Company 3's higher interest coverage ratio makes it the most solvent of the three.
Author: LeetQuiz Editorial Team
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An analyst evaluates the following financial data for three companies (in $ millions):
| Company | Total Assets | Total Debt | Total Equity | EBIT | Interest Payments |
|---|---|---|---|---|---|
| Company 1 | 100 | 20 | 80 | 8 | 4 |
| Company 2 | 200 | 50 | 150 | 10 | 4 |
| Company 3 | 400 | 80 | 320 | 12 | 4 |
Based on the provided data, which company demonstrates the highest solvency?
A
Company 1
B
Company 2
C
Company 3
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