The Corrigan Corporation’s forecasted 2005 financial statements follow, along with some industry average ratios.

a. Calculate Corrigan’s 2005 forecasted ratios, compare them with the industry average data, and comment briefly on Corrigan’s projected strengths and weaknesses.

b. What do you think would happen to Corrigan’s 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.

Corrigan Corporation: Forecasted Balance Sheet as of December 31, 2005 $ 72,000 Cash Accounts receivable 439,000 894,000 Inventories Total current assets $1,405,000 Fixed assets 431,000 Total assets $1,836,000 $ 432,000 Accounts and notes payable Accruals 170,000 $ 602,000 Total current liabilities Long-term debt Common stock 404,290 575,000 Retained carnings Total liabilities and equity 254,710 $1,836,000 Corrigan Corporation: Forecasted Income Statement for 2005 Sales $4,290,000 Cost of goods sold 3,580,000 Selling, general, and administrative expenses 370,320 Depreciation 159,000 $ 180,680 Earnings before taxes (EBT) Taxes (40%) 72,272 $ 108,408 Net income Per-Share Data EPS $4.71 Cash dividends per share $0.95 P/E ratio 5x Market price (average) $23.57 Number of shares outstanding 23.000 Industry Financial Ratios (2004)a Quick ratio 1.0x 2.7X Current ratio Inventory turnovcrb Days sales outstanding Fixed assets turnover 7.0x 32 days 13.0x Total assets turnoverb 2.6x Return on assets 9.1% Return on cquity 18.2% Debt ratio 50.0% Profit margin on sales 3.5% P/E ratio 6.0x P/cash flow ratio 3.5x 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.