Which of the following is a criticism of a policy of maximizing the firm’s return on...

Which of the following is a criticism of a policy of maximizing the firm’s return on equity (ROE)?

ROE is based on after-tax earnings, not cash flows.

ROE does not consider risk.

ROE ignores the size of the initial investment as well as future cash flows.

All of these are criticisms of ROE as a goal.

Expert Solution

Correct answer is -

All of these are criticisms of ROE as a goal.

Return on equity can be calculated by dividing Net income after taxes to the total equity of the firm.

It is not based on cash flows and it does not considers the risk involved in the firm/project. It also does not take into account the initial investment and future cash flows. It is calculated by dividing Net income after taxes to the total equity of the firm.

jeff jeffy answered 2 years ago

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