Which one of the following is a criticism of equating the goals of maximizing the return on equity (ROE) of a firm and maximizing the firm's shareholder wealth?
A) ROE is based on after-tax earnings, not cash flows.
B) ROE does not consider risk.
C) ROE ignores the size of the initial investment as well as future cash flows.
D) All of the above are criticisms of ROE as a goal.

Question

Quizplus · Accepted Answer

All of the given options are valid criticisms of equating the goals of maximizing the return on equity (ROE) of a firm and maximizing the firm's shareholder wealth. ROE only considers after-tax earnings, not cash flows, and it does not factor in the risks associated with an investment. Additionally, ROE fails to take into account the size of a firm's initial investment and the potential for future cash flows. Therefore, all three options are valid criticisms of ROE as a goal.

Which One of the Following Is a Criticism of Equating