Analysts and investors often use return on equity $($ROE$)$ to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company's ROE numbers look good.

If a firm takes steps that increase its expected future ROE, its stock price will increase.

Based on your understanding of the uses and limitations of ROE, a rational investor is likely to prefer an investment option that has:

High ROE and high risk

High ROE and low risk

Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company's performance. If you wanted to conduct a comparative analysis for the current year, you would:

Compare the firm's financial ratios with other firms in the industry for the current year

Compare the firm's financial ratios for the current year with its ratios in previous years

You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors $($AAII$).$ According to your understanding, a company with one key product is considered to be $q,$ risky than companies with a wide range of products.

The American Association of Individual Investors $($AAII$)$ has identified several qualitative factors that should also be considered when evaluating a company's likely future financial performance. Consider the scenario and indicate how you would expect the described event or situation to affect the described business organization.

Southern Supply Inc.

As a result of targeting by unethical product liability attorneys, Southern, a small manufacturer of a revolutionary crawfish steamer, currently has a multimillion$-$dollar class action lawsuit pending.

Although the steamer is completely reliable and safe, one person was injured as a result of using it inappropriately. Other purchasers have joined the lawsuit in an effort to collect "free" funds. $q,$

How would you expect this situation to affect the assessment of Southern's financial condition and performance?

Being small, Southern may lack the financial resources and media$-$management expertise to successfully defend itself in the lawsuit and the media. This could jeopardize Southern's current and future sales and profits.

Although nonquantitative factors may be relevant to a company's financial evaluation in general terms, the details of this specific situation are not relevant to the firm's financial condition or performance.

Lawsuits guarantee free advertising and therefore should be guaranteed to increase the firm's current and future sales and profits.$$