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Calculate all of the ratios listed in the industry table for East Coast yachts.
Current ratio = (Current assets)/(Current liabilities) = ($ 11,270,000)/($
15,030,000) = 0.7498
Quick ratio = (Current assets-Inventory)/(Current liabilities) = ($ 11,270,000-$
4,720,000)/($ 15,030,000) = 0.4358
Total asset turnover = Sales/(Total assets) = ($ 128,700,000)/($ 83,550,000) =
1.5404
Inventory turnover = (Cost of goods sold)/Inventory = ($ 90,700,000)/($
4,720,000) = 19.2161
Receivables turnover = Sales/(Accounts receivable) = ($ 128,700,000)/($
4,210,000) = 30.5701
Total debt ratio = (Total assets-Total equity)/(Total assets) = ($ 83,550,000-$
42,570,000)/($ 83,550,000) = 0.4905
Debt-equity ratio = (Total debt)/(Total equity) = ($ 15,030,000-$ 25,950,000)/($
42,570,00) = 0.9626
Equity multiplier = (Total assets)/(Total equity) = ($ 83,550,000)/($ 42,570,00)
= 1.9626
Interest coverage = EBIT/Interest = ($ 18,420,000)/($ 2,315,000) = 7.9568
Profit margin = (Net income)/Sales = ($ 9,663,000)/($ 128,700,000) = 0.0751
Return on assets
= (Net income)/(Total assets) = ($ 9,663,000)/($
83,550,000) = 0.1157
Return on equity = (Net income)/(Total equity) = ($ 9,663,000)/($ 42,570,00) =
0.2270
2. Compare the performance of East Coast Yachts to the industry as a whole. For
each ratio comment on why it might be viewed as positive or negative relative to
the industry. Suppose you create an inventory ratio calculated as inventory
divided by current liabilities. How do you interpret this ratio? How does East
Coast Yachts compare to the industry average?
Answer)
2.
Regarding the liquidity ratios, East Coast Yachts current ratio is
below the median industry ratio. This implies the company has less liquidity
than the industry in general. However, the current ratio is above the lower
quartile, so there are companies in the industry with lower liquidity than East
Coast Yachts. The company may have more predictable cash flows, or more access
to short-term borrowing.
The turnover ratios are all higher than the industry median; in fact, all three
turnover ratios are above the upper quartile. This may mean that East Coast
Yachts is more efficient than the industry in using its assets to generate
sales.
The financial leverage ratios are all below the industry median, but above the
lower quartile. East Coast Yachts generally has less debt than comparable
companies, but is still within the normal range.
The profit margin for the company is about the same as the industry median, the
ROA is slightly higher than the industry median, and the ROE is well above the
industry median. East Coast Yachts seems to be performing well in the
profitability area.
Overall, East Coast Yachts performance seems good, although the liquidity
ratios indicate that a closer look may be needed in this area.
Below is a list of possible reasons it may be good or bad that each ratio is
higher or lower than the industry. Note that the list is not exhaustive but
merely one possible explanation for each ratio.
If you created an Inventory to current liabilities ratio, East Coast Yachts
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would have a ratio that is lower than the industry median. The current ratio is
below the industry median, while the quick ratio is above the industry median.
This implies that East Coast Yachts has fewer inventories to current liabilities
than the industry median. Because the cash ratio is lower than the industry
median, East Coast Yachts has fewer inventories than the industry median, but
more accounts receivable.
Ratio:
Current ratio: Good (Better at managing current accounts.)
Bad (May be having liquidity problems.)
Quick ratio: Good
(Better at managing current accounts.)
Bad (May be having liquidity problems.)
Total asset turnover: Good (Better at utilizing assets.)
Bad (Assets may be older and depreciated, requiring extensive investment soon.)
Inventory turnover: Good (Better at inventory management, possibly due to better
procedures.)
Bad (Could be experiencing inventory shortages.)
Receivables turnover: Good (Better at collecting receivables.)
Bad (May have credit terms that are too strict. Decreasing receivables turnover
may increase sales.)
..
..

3. Calculate the sustainable growth rate of East Coast Yachts. Calculate


external funds needed (EFN) and prepare pro forma income statement and balance
sheets assuming growth at precisely this rate. Recalculate the ratios in the
previous questions. What do you observe?
Answer)
3.
To calculate the internal growth rate, we first need to find the ROE and
the retention ratio, so:
ROE = (Net income)/(Total equity) = 9,633,000/42,570,000
= 0.2270 or 22.70%
b = (Addition to Retained earnings )/(Net income)
= 3,865,200/9,663,000 = 0.40 or 40%
So, the sustainable growth rate is:
Sustainable growth rate = (ROE b)/(1-(ROE b))
= (0.2270 0.40)/(1-(0.2270 0.40))
Sustainable growth rate = 0.0999 or 9.99%
The sustainable growth rate is the growth rate the company can achieve with no
external financing while maintaining a constant debt-equity ratio.
At the sustainable growth rate, the pro forma statements next year will be:
Income Statement
Sales
$ 141,557,130.00
Cost of goods sold
$ 99,760,930.00
Other expenses
$ 16,916,462.00
Depreciation
$ 4,200,000.00
Earnings before interest and taxes
$ 20,679,738.00
Interest
$ 2,315,000.00
Taxable income
$ 18,364,738.00
Taxes (40%)
$ 7,085,556.00
Net income
$ 11,279,782.00
Dividends
$ 6,377,000
Addition to retained earnings
$ 4,902,182
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Balance sheet
Assets
Liabilities & Equity
Current Assets
Current Liabilities
Cash
$ 2,573,766 Accounts Payable
$ 5,466,503
Accounts receivable
$ 4,630,579 Notes Payable
Inventory
$ 5,191,528 Total Current Liabilities
Total Current Assets
$ 12,395,873
Long-term debt
Shareholders Equity
Common stock
$ 4,000,000
Fixed assets
Retained earnings
$ 42,423,143
Net Plant & Equipment
$ 79,500,772
Total Equity

$ 10,060,000
$ 15,526,503
$ 25,950,000

$ 46,423,143

Total Assets
$ 91,896,645
Total Liabilities & Equity
$ 87,899,646
So, the External Financing Needed (EFN) is:
EFN = Total assets Total liabilities and equity
EFN = $ 91,896,645 $ 87,899,646 = $ 3,996,999
The ratios with these pro forma statements are:
Current ratio = ($ 12,395,873)/($ 15,526,503)
= 0.7984
Quick ratio = ($ 12,395,873-$ 5,191,528)/($ 5,526,503)
= 0.4640
Total asset turnover = ($141,557,130)/($1,896,645)
= 1.5404
Inventory turnover = ($ 99,760,930)/($ 5,191,528)
= 19.2161
Receivables turnover = ($ 141,557,130)/($ 4,630,579)
= 30.5701
Total debt ratio = ($ 91,896,645-$ 46,423,143)/($ 91,896,645)
= 0.4948
Debt-equity ratio = ($ 15,526,503+$ 25,950,000)/($ 91,896,645)
= 0.8934
Equity multiplier = ($ 91,896,645)/($ 46,423,143)
= 1.9795
Interest coverage = ($ 20,679,738)/($ 2,315,000)
= 8.9329
Profit margin = ($ 4,902,182)/($ 141,557,130)
= 0.0797
Return on assets
= ($ 4,902,182)/($ 91,896,645)
= 0.1227
Return on equity = ($ 4,902,182)/($ 46,423,143)
= 0.2430
The only ratios that changed are the debt ratio, the interest coverage ratio,
profit margin, return on assets, and return on equity. The debt ratio changes
because long-term debt is assumed to remain fixed in the pro forma statements.
The other ratios change slightly because interest and depreciation are also
assumed to remain constant as well.

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