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GROUP ASSIGNMENTS 4

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Group Members:
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Name Id Number
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Ruqaiyah Binti Mohd Rodzi AIU18092016

Norziana Bt Amei AIU18092017
Fatin Edrina Nabila Bt Baharudin AIU18092018
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Nurul Nadhirah Bt Muhd Zahir AIU18092019

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Muhammad Salehuddin B Muhd Serimenati AIU18092020

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Submission for:
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CODE BBF 2013

SUBJECT INTRODUCTION TO FINANCE
LECTURER DR. ABDUL RAHEEM B. MOHAMAD YUSOF
DUE DATE 8TH JANUARY 2020

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 Problem 4-24

Corrigan Corporation's December 31 Balance Sheets

2007 2008

Assets $
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 238 000 271 000
Machinery 132 000 133 000
Other fixed assets 61 000 57 000

Total assets 1 836 000 1 667 000

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Liabilities and equity

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Accounts and notes payable 432 000 409 500

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Accrued liabilities 170 000 162 000
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Total current liabilities 602 000 571 500
Long-term debt 404 290 258 898
Common stock 575 000 575 000
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Retained earnings 254 710 261 602

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Total liabilities and equity 1 836 000 1 667 000

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 Corrigan Corporation's December 31 Income Statements

2007 2008
$
Sales 4 240 000 3 635 000
Cost of goods sold 3 680 000 2 980 000
Gross operating profit 560 000 655 000
General admin. and selling expenses 236 320 213 550
Depreciation 159 000 154 500
Miscellaneous 134 000 127 000
EBT 30 680 159 950
Taxes (40%) 12 272 63 980
Net income 18 408 95 970

Per-Share Data 2011 2010

EPS $0.80 $4.17
Cash dividends $1.10 $0.95

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Market price (average) $12.34 $23.57
P/E ratio 15.43 5.65

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Number of shares outstanding 23 000 23 000

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Once we have this information set, we can calculate the necessary ratios for this analysis.
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Industry
Ratio Analysis 2007 2008 Average
Liquidity
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Current ratio 2.33 2.11 2.7

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Asset Management
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Inventory turnover 4.74 4.47 7.0

Days sales outstanding 37.79 32.94 32
Fixed assets turnover 9.84 7.89 13.0
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Total assets turnover 2.31 2.18 2.6

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Profitability
Return on assets 1.00% 5.76% 9.1%
Return on equity 2.22% 11.47% 18.2%
Profit margin 0.43% 2.64% 3.5%
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Debt Management
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Debt-to-assets ratio 54.81% 49.81% 50.0%

Market Value
P/E ratio 15.43 5.65 6.0

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

2
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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 1405 000

¿ =2.11׿ ¿ =2.33׿
571500 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.

b. Assess Corrigan's asset management position and determine how it compares

with peer and how its asset management efficiency has changed over time.

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Total Assets Turnover

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2007 2008
3 635 000 4 240 000

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=2.18׿ rs e =2.31׿
1 667 000 1 836 000
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 Net Plant & Equipment = Land & Building + Machinery
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2007 = 271,000 + 133,000 = 404,000

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2008 = 238,000 + 132,000 = 370,000

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Fixed Assets Turnover

2007 2008
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3 635 000 4 240 000

=9.0׿ =11.46׿
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404 000 370 000

Inventory Turnover
2007 2008
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2 980 000 3 680 000

=3.67׿ =4.12׿
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813 000 894 000

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.

3
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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.

Total Liability
Debt ratio:
Total assets

2007 2008
571 000 602000
× 100=34.28 %∨0.3428 ×100=32.79 %∨0.3279
1 677 000 1 836 000

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Corrigan's debt ratio has decreased from 2007 to 2008, which is good. There is a

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positive improve for Corrigan Corporation compared with the peers 50%, it is better.

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d. Assess Corrigan's profitability ratios and determine how they compare with
peers and how its profitability position has changed over time.
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2007 2008
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625 000 560 000

¿ =18.02 % ¿ =13.21 %
3 635 000 4 240 000
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Corrigan's profitability ratios have declined substantially from 2007 to 2008, and
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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).
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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.

Market price per share

 Price-earnings ratios
Earning per share

2007 2008
23.57 12.34
=5.65 =15.43
4.17 0.80

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

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potential and/or less risk than the peer group.

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 Market to book ratio
2007 2008

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= 23.57÷36.37
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= 0.65 = 0.34
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Corrigan's P/E ratio has increased from 2007 to 2008, but only because its net
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income has declined significantly from the prior year.

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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
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compare with the industry average numbers?

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Net Income Sales 1

DuPon Roe Formula: × ×
Sales Total Assets 1−Debt Ratio
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2007 2008
95 970 3635 000 1 18 408 4 240 000 1
× × × ×
3 635 000 1667 000 1−0.3428 4 240 000 1836 000 1−0.3279

¿ 0.0876∨8.76 % = 0.0149 or 1.49%

5
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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.

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

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be affected by changes in these two accounts.

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If Corrigan initiated cost-cutting measures, this would increase its net income.

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This would improve its profitability ratios and market value ratios. If Corrigan also

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reduced its levels of inventory, this would improve its current ratio as this would
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reduce liabilities as well. This would also improve its inventory turnover and total
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assets turnover ratios. Reducing costs and lowering inventory would also improve its
debt ratio.
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If the company adopted a cost cutting measure which subsequently resulted in

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reduction of inventory levels and cost of goods sold, then it will affect multiple
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financial ratios as highlighted below:

 Reduction of cost of goods sold will improve the gross profit which will in
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turn will increase the company's gross profit margin and subsequently the net
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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
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net profit margin as well as Return on Assets, Return on Equity (all

profitability ratios basically)
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 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

6
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