e. Assess Corrigans market value ratios, and determine how its valuation compares with peers and how it has changed over time. Assume the firms debt is priced at par, so the market value of its debt equals its book value.
f. Calculate Corrigans ROE as well as the industry average ROE, using the DuPont equation. From this analysis, how does Corrigans 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
Chapter 4 Analysis of Financial Statements 4 143 144 Part 2 Fundamental Concepts in Financial Management Industry Financial Ratios 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? 8. 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. 2018 2.7x 7.0X 320 days 13.0x 2.6% Current ratio Inventory turnover Days sales outstanding Fixed assets turnover Total assets turnover Return on assets Return on equity Return on invested capital Profit margin Debt-to-capital ratio P/E ratio M/B ratio EV/EBITDA ratio Industry average ratios have been constant for the past 4 years Based on year-end balance sheet figures. "Calculation is based on a 365-day year. 9.190 18.2% 14.5% 3.5% 50.096 60X 15 Corrigan Corporation: Balance Sheets as of December 31 2018 2017 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 Accounts payable $ 80,000 $ 72,70B Accrued liabilities 45,010 40,880 Notes payable 476,990 457,912 Total current liabilities $ 602,000 $ 571,500 Long-term debt 404,290 258,898 Common stock 575,000 575,000 Retained earnings 254,710 261,602 Total liabilities and equity $1,836,000 $ 1,667.000 610 INTEGRATED CASE D'LEON INC., PART II Corrigan Corporation: Income Statements for Years Ending December 31 2018 2017 Sales $4,240,000 $ 3,635,000 Cost of goods sold 3,680,000 2,990,000 Gross operating profit $ 560,000 $ 655,000 General administrative and selling expenses 303,320 297,550 Depreciation 159,000 154,500 EBIT $ 97,680 $ 202,950 Interest 67,000 43,000 Earnings before taxes (EBT) $ 30,680 $ 159,950 Taxes (40%) 12,272 63,990 Net income $ 18,408 $ 95,970 4-26 FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival. Donna Jamison was brought in as assistant to Fred Campo, D'Leon's chairman, who had the task of getting the company back into a sound financial position. D'Leon's 2017 and 2018 balance sheets and income statements, together with projections for 2019, are given in Tables IC 4.1 and IC 4.2. In addition, Table IC 4-3 gives the company's 2017 and 2018 financial ratios, together with industry average data. The 2019 projected financial statement data represent Jamison's and Campo's best guess for 2019 results, assuming that some new financing is arranged to get the company "over the hump" Jamison examined monthly data for 2018 (not given in the case), and she detected an improving pat- tern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the company-provided it can survive in the short run. Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers. a. Why are ratios useful? What are the five major categories of ratios? b. Calculate D'Leon's 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity positions in 2017, in 2018, and as projected for 2019? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the company's liquidity ratios? Explain your answer. 2017 Per-Share Data 2018 EPS $ 0.80 Cash dividends $ 1.10 Market price (average) $1234 P/E ratio 15.42% Number of shares outstanding 23,000 $ 4.17 $ 0.95 $23.57 5.65 x 23,000 Copyright 2019 Cangage Learning. All Rights Reserved. May not be copied, scanned or duplicated in whole or in part. WCN 02-200-203 Copyright 2019Cpy carat Mayans at , wtitain as the ashaai ts upananadiar is an Fauna minutunate palamaataean .Lanka aanaa thaalaatta aalaa Copyright 2019 Cangage Learning. All Rights Reserved. May not be copied, scanned or duplicated in whole or in part. WCN 02-200-203 Copyright 2019 ral. My an ant , itain as the ashaai ts appearanadiar is an Fauna miniatural palaaaa aatayan .Lamiag aanate lathaalaayinaithale aattaa
