Cody Scott would like to screen potential equity investments to identify value stocks and selects firms that
have low price-to-sales ratios. Unfortunately, screening stocks based only on this criterion may result in
stocks that have poor profitability or high financial leverage, which are undesirable to Scott. Which of the
following filters could be added to the stock screen to best control for poor profitability and high financial
leverage?
Filter #1 – Include only stocks with a debt-to-equity ratio that is above a certain benchmark value.
Filter #2 – Include only dividend paying stocks.
Filter #3 – Include only stocks with an assets-to-equity ratio that is below a certain benchmark value.
Filter #4 – Include only stocks with a positive return-on-equity.
Poor profitability High financial leverage
A) Filter #4 Filter #3
B) Filter #4 Filter #1
C) Filter #2 Filter #3
Answer C pls explain why Option A is wrong????
Option A is wrong because Filter 4 says stocks with positive ROE, positive ROE does not satisfy the same it should have been positive and high and in some case it equity can become negative because of huge losses and that will lead to higher negative RE. So if profits and equity both are negative, it will lead to positive ROE.
But if a firm is paying dividend that means that means firm is earning dividend consistently.