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sh is ar stu ed d v i y re aC s o ou urc rs e eH w er as o. co m GROUP ASSIGNMENTS 4 (Corrigan Corporation) Group Members:

Name

Id Number

Th

Ruqaiyah Binti Mohd Rodzi Norziana Bt Amei Fatin Edrina Nabila Bt Baharudin Nurul Nadhirah Bt Muhd Zahir Muhammad Salehuddin B Muhd Serimenati

CODE SUBJECT LECTURER DUE DATE

AIU18092016 AIU18092017 AIU18092018 AIU18092019 AIU18092020

Submission for:

BBF 2013 INTRODUCTION TO FINANCE DR. ABDUL RAHEEM B. MOHAMAD YUSOF 8TH JANUARY 2020

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Problem 4-24 Corrigan Corporation's December 31 Balance Sheets 2007 Assets Cash Accounts receivable Inventories

2008

$ 65 000 328 000 813 000

Total current assets Land and building Machinery Other fixed assets

1 405 000 238 000 132 000 61 000

1 206 000 271 000 133 000 57 000

Total assets

1 836 000

1 667 000

Accounts and notes payable Accrued liabilities

432 000 170 000

409 500 162 000

Total current liabilities Long-term debt Common stock Retained earnings

602 000 404 290 575 000 254 710

571 500 258 898 575 000 261 602

1 836 000

1 667 000

sh is ar stu ed d v i y re aC s o ou urc rs e eH w er as o. co m

72 000 439 000 894 000

Liabilities and equity

Th

Total liabilities and equity

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Corrigan Corporation's December 31 Income Statements 2007

2008

$ Sales Cost of goods sold Gross operating profit General admin. and selling expenses Depreciation Miscellaneous EBT Taxes (40%) Net income

3 635 000 2 980 000 655 000 213 550 154 500 127 000 159 950 63 980 95 970

2011 $0.80 $1.10 $12.34 15.43 23 000

2010 $4.17 $0.95 $23.57 5.65 23 000

sh is ar stu ed d v i y re aC s o ou urc rs e eH w er as o. co m

Per-Share Data EPS Cash dividends Market price (average) P/E ratio Number of shares outstanding

4 240 000 3 680 000 560 000 236 320 159 000 134 000 30 680 12 272 18 408

Once we have this information set, we can calculate the necessary ratios for this analysis. Ratio Analysis

Th

Liquidity Current ratio Asset Management Inventory turnover Days sales outstanding Fixed assets turnover Total assets turnover Profitability Return on assets Return on equity Profit margin Debt Management Debt-to-assets ratio Market Value P/E ratio a

2007

2008

Industry Average

2.33

2.11

2.7

4.74 37.79 9.84 2.31

4.47 32.94 7.89 2.18

7.0 32 13.0 2.6

1.00% 2.22% 0.43%

5.76% 11.47% 2.64%

9.1% 18.2% 3.5%

54.81%

49.81%

50.0%

15.43

5.65

6.0

Industry average ratios have been constant for the past 4 years. Based on year-end balance sheet figures. c Calculation is based on a 365-day year. b

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a. Assess Corrigan's liquidity position and determine how it compares with peers and how the liquidity position has changed over time. 2007 ¿

2008

1206 000 =2.11׿ 571500

¿

1405 000 =2.33׿ 602 000

Corrigan's liquidity position has improved from 2007 to 2008 however, the current ratio is still below the industry average which is 2.7 x. Corrigan Corporation can bring its ratio at part with its peers either by reducing its current liabilities or by increasing current assets.

sh is ar stu ed d v i y re aC s o ou urc rs e eH w er as o. co m

b. Assess Corrigan's asset management position and determine how it compares with peer and how its asset management efficiency has changed over time. Total Assets Turnover

2007 3 635 000 =2.18׿ 1 667 000 

2008 4 240 000 =2.31׿ 1 836 000

Net Plant & Equipment = Land & Building + Machinery 2007 = 271,000 + 133,000 = 404,000 2008 = 238,000 + 132,000 = 370,000

Fixed Assets Turnover

2007

2008

3 635 000 =9.0׿ 404 000

4 240 000 =11.46׿ 370 000

Inventory Turnover

2007

2008

3 680 000 =4.12׿ 894 000

Th

2 980 000 =3.67׿ 813 000

Corrigan's inventory turnover, fixed assets turnover, and total assets turnover have improved from 2007 to 2008; however, they are still below industry averages. The firm's days sales outstanding ratio has increased from 2007 to 2008--which is bad. In 2007, its DSO was close to the industry average. In 2008, its DSO is somewhat higher. If the firm's credit policy has not changed, it needs to look at its receivables and determine whether it has any uncollectible. If it does have uncollectible receivables, this will make its current ratio look worse than what was calculated above.

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2008 is better than 2007 because the fixed assets turnover was increasing. However, fixed assets turnover of Corrigan Corporation a little bit low than the peer group’s fixed assets turnover which is 13.0x.

c. Assess Corrigan's debt management position and determine how it compares with peers and how its debt management has changed over time. Debt ratio:

Total Liability Total assets 2008 602000 ×100=32.79 %∨0.3279 1 836 000

sh is ar stu ed d v i y re aC s o ou urc rs e eH w er as o. co m

2007 571 000 × 100=34.28 %∨0.3428 1 677 000

Corrigan's debt ratio has decreased from 2007 to 2008, which is good. There is a positive improve for Corrigan Corporation compared with the peers 50%, it is better.

d. Assess Corrigan's profitability ratios and determine how they compare with peers and how its profitability position has changed over time. 2007

¿

2008

625 000 =18.02 % 3 635 000

¿

560 000 =13.21 % 4 240 000

Th

Corrigan's profitability ratios have declined substantially from 2007 to 2008, and they are substantially below the industry averages. Corrigan needs to reduce its costs, increase sales, or both. Profitability ratios are used to address a very fundamental thing. Profit margin decrease from 18.02% (2007) to 13.21% (2008).

Corrigan Corporation spent 0.87 for the cost of goods sold for each dollar of sales. This leave 0.13 out of each dollar of sales that goes to gross profit. This means Corrigan has a low-price strategy compared to its peer firm

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e. Assess Corrigan's market value ratios and determine how its valuation compares with peers and how it has changed over time.  Price-earnings ratios

23.57 =5.65 4.17

Market price per share Earning per share

2007

12.34 =15.43 0.80

2008

sh is ar stu ed d v i y re aC s o ou urc rs e eH w er as o. co m

The investors were willing to pay $15.4 (2018) for every dollar of earning per share that Corrigan Corp produced, compared to an average PE ratio of 6.0 times for the peer group. Thus, investors must perceive Corrigan Corp to have more growth potential and/or less risk than the peer group.  Market to book ratio 2007 = 23.57÷36.37 = 0.65

2008 = 12.34÷36.07 = 0.34

Corrigan's P/E ratio has increased from 2007 to 2008, but only because its net income has declined significantly from the prior year. f. Calculate Corrigan's ROE as well as the industry average ROE using the DuPont equation. From this analysis, how does Corrigan's financial position compare with the industry average numbers? Net Income Sales 1 × × Sales Total Assets 1−Debt Ratio

Th

DuPon Roe Formula:

2007 95 970 3635 000 1 × × 3 635 000 1667 000 1−0.3428

2008 18 408 4 240 000 1 × × 4 240 000 1836 000 1−0.3279

¿ 0.0876∨8.76 %

= 0.0149 or 1.49%

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Looking at the DuPont equation, Corrigan's profit margin is significantly lower than the industry average and it has declined substantially from 2007 to 2008. The firm's total assets turnover has improved slightly from 2007 to 2008, but it's still below the industry average at 9.1%. This indicates that the firm's debt ratio is increasing, and it is higher than the industry average. Corrigan should increase its net income by reducing costs, lower its debt ratio, and improve its asset management by either using less assets for the same amount of sales or increase sales.

sh is ar stu ed d v i y re aC s o ou urc rs e eH w er as o. co m

g. What do you think would happen to its ratios if the company-initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decreased the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts. If Corrigan initiated cost-cutting measures, this would increase its net income. This would improve its profitability ratios and market value ratios. If Corrigan also reduced its levels of inventory, this would improve its current ratio as this would reduce liabilities as well. This would also improve its inventory turnover and total assets turnover ratios. Reducing costs and lowering inventory would also improve its debt ratio. If the company adopted a cost cutting measure which subsequently resulted in reduction of inventory levels and cost of goods sold, then it will affect multiple financial ratios as highlighted below: 

Th



Reduction of cost of goods sold will improve the gross profit which will in turn will increase the company's gross profit margin and subsequently the net profit margin (keeping all other things constant) As the company adopted cost cutting measures, it implies that the company's operating expenses also came down which will help the company improve its net profit margin as well as Return on Assets, Return on Equity (all profitability ratios basically) If the proportionate reduction in inventory levels is more than the proportionate reduction in cost of goods sold, then this will help in improving the Inventory Turnover Ratio i.e. the company will be deemed to be more efficient as it is able to convert its inventories into sales more effectively



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