Question

11. More on ratio analysis Aa Aa E 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: O O A high ROE and low risk A high ROE and high 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 trend analysis, you would: Compare the firm's financial ratios with other firms in the industry for a particular year Analyze the firm's financial ratios over time 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 each scenario and indicate how you would expect the described event or situation to affect the described business organization. How would you expect this situation to affect the assessment of Northern's financial condition and performance? Northern Services Inc. Northern assembles computers in the owner's garage from parts the owner orders over the Internet. This industry is characterized by low barriers to entry, including few operating licenses or governmental approvals, and small investments in productive equipment or facilities. Its low barriers to entry expose Northern to decreased risk of competition, which could improve the predictability of its expected future sales revenues. Its low barriers to entry expose Northern to increased risk of competition, which could negatively affect the predictability of its expected future sales revenues. 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.

Answer 1

1.If a firm takes steps that increases its expected future ROE,The stock price will MOST PROBABLY INCREASE .

2.A rational investor will take an investment which has HIGH ROE AND LOW RISK

3.Since trend analysis is related to performance of a stock in past years,SO, We will ANALYSE THE FIRM'S FINANCIAL RATIOS OVER A PERIOD OF TIME.

4.A)IF Low barriers will decrease the competition, it will surely INCREASE THE ROE OF THE FIRM as number of lesser competitors will insure higher profitability

B)IF Low barriers will increase the competition, it will surely DECREASE THE ROE OF THE FIRM as number of higher competitors will insure lower profitability

C)Non quantitative factors are also a factor for financial consideration but they doesnot impact the overall finacial position of a company. But in modern times, investors look for survival as well as profitability of a firm so the firm does need to give these factors a consideration.