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 gobd. 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, which of the following projects should be chosen if they have the same risk and cost of capital? Project Y, with 40% ROE and a small investment, generating low expected cast flows Project X, with 35% ROE and a large investment, generating high expected cash flows 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 Assocathon af individual Investars (AAII). According to your understanding, a company with less competition is considered to be risky than companies with multiple competitors. The American Association of Individual Investors (AAII) has identffed several qualitative factors that should also be considered when evaluating a company's Ilkely future finandal performance. Consider the scenario and indicate how you would expect the described event or situation to affect the described business organization. Eastern Manufacturing Products Inc. As a result of targeting by unethical product llability attomeys, Eastem, 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 lawsult in an effort to collect "free" funds. How would you expect this situation to affect the assessment of Eastern's fnancial condition and performance? Lawsuits guarantee free advertising and therefore should be guaranteed to increase the firm's current and future sales and profits. Although nonquantitative factors may be relevant to a company's financial evaluation in general tha in the details of this specific situation are not relevant to the firm's financial condition or performance. Being small, Eastern may lack the financial resources and media-management expertise to sulcusufuily defend itself in the lawsuit and the media. This could jeopardize Eastern's current and future sales and profits. 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, which of the should be chosen of capital? Project Y, with 40% ROE and a small investment, generating low exi
