COMPREHENSIVE/SPREADSHEET PROBLEM
RATIO ANALYSIS The Corrigan Corporation’s 2007 and 2008 financial statements follow, along with some industry average ratios.
a. Assess Corrigan’s liquidity position and determine how it compares with peers and how the liquidity position has changed over time.
b. Assess Corrigan’s asset management position and determine how it compares with peers and how its asset management efficiency has changed over time.
c. Assess Corrigan’s debt management position and determine how it compares with peers and how its debt management has changed over time.
d. Assess Corrigan’s profitability ratios and determine how they compare with peers and how its profitability position has changed over time.
e. Assess Corrigan’s market value ratios and determine how its valuation compares with peers and how it has changed over time.
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?
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.
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Corrigan Corporation: Balance Sheets as of December 31 |
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|
2007 |
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|
Cash |
$72,000 |
$65,000 |
|
Accounts receivable |
439,000 |
328,000 |
|
Inventories |
894,000 |
813,000 |
|
Total current assets |
$1,405,000 |
$1,206,000 |
|
Land and building |
$238,000.00 |
271,000 |
|
Machinery |
132,000 |
133,000 |
|
Other fixed assets |
$61,000.00 |
57,000 |
|
Total assets |
$1,836,000 |
$1,667,000 |
|
Accounts and notes payable |
432,000 |
$409,500 |
|
Accrued liabilities |
$170,000.00 |
162,000 |
|
Total current liabilities |
602,000 |
$571,500 |
|
Long term debt |
$404,290.00 |
258,898 |
|
Common stock |
575,000 |
575,000 |
|
Retained earnings |
$254,710.00 |
261,602 |
|
Total liabilities and equity |
$1,836,000 |
$1,667,000 |
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Corrigan Corporation: Income Statements for Years Ending December 31 |
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|
2008 |
2007 |
|
|
Sales |
$4,240,000 |
$3,635,000 |
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Cost of goods sold |
3,680,000 |
2,980,000 |
|
Gross operating profit |
$560,000 |
$655,000 |
|
General administrative and selling expenses |
236,320 |
213,550 |
|
Depreciation |
159,000 |
154,500 |
|
Miscellaneous |
134,000 |
127,000 |
|
Earnings before taxes (EBT) |
$30,680 |
$159,950 |
|
Taxes (40%) |
12,272 |
63,980 |
|
Net income |
$18,408 |
$95,970 |
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Per Share Data |
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|
2008 |
2007 |
|
|
EPS |
$1 |
$4 |
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Cash dividends |
1 |
1 |
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Market price (average) |
$12 |
$24 |
|
P/E ratio |
15.4× |
5.65× |
|
Number of shares outstanding |
23,000 |
23,000 |