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# Performance Factors

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Scenario 1: If you were general manager of a division, on which three key ratios would you choose to have your unit's financial performance evaluated? Please explain your choices, and the yardsticks that you would use to measure your company's performance.

Scenario 2: In looking at an analysis of financial statements that you have prepared for your employer, a management team member points out that the gross profit margin rate has declined in each of the past three years. How would you explain and evaluate the reasons for this situation? What other ratios might be useful in your analysis?

Scenario 3: The current ratio in the company, for which you are a financial analyst, is 3 to 1. The average for other firms in the industry is 1.6 to 1. Management has asked you to evaluate the company's ratio, and explain why it is nearly twice the industry's average. What factors are responsible for the difference? Are we better off than our competitors, or worse? Explain.

Your answers should be detailed enough to support your explanation for each situation.

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#### Solution Preview

Scenario 1: The three key ratios I would choose to have my unit's financial performance evaluated would be the Return on total assets (ROA), Profit margin on sales, and Return on common equity (ROE). I choose these three ratios because they all measure the profitability of a firm or an unit. I would use the company's net income, total assets, common equity, and sales to measure ...

#### Solution Summary

This solution is comprised of detailed explanation regarding each of the following scenarios:

Scenario 1: If you were general manager of a division, on which three key ratios would you choose to have your unit's financial performance evaluated? Please explain your choices, and the yardsticks that you would use to measure your company's performance.

Scenario 2: In looking at an analysis of financial statements that you have prepared for your employer, a management team member points out that the gross profit margin rate has declined in each of the past three years. How would you explain and evaluate the reasons for this situation? What other ratios might be useful in your analysis?

Scenario 3: The current ratio in the company, for which you are a financial analyst, is 3 to 1. The average for other firms in the industry is 1.6 to 1. Management has asked you to evaluate the company's ratio, and explain why it is nearly twice the industry's average. What factors are responsible for the difference? Are we better off than our competitors, or worse? Explain.

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