Dan Ervin was recently hired by West Coast Yachts Ltd to assist the company with its shortterm financial planning and also to evaluate the company’s financial performance. Dan graduated from university 5 years ago with a finance degree, and he has been employed in the treasury department of a FTSE 100 company since then.
West Coast Yachts was founded 10 years ago by Larissa Warren. The company’s operations are located in a well-known marina, Inverkip, on the west coast of Scotland. The firm is structured as a private limited company. The company has manufactured custom midsize, highperformance yachts for clients over this period, and its products have received high reviews for safety and reliability. The company’s yachts have also recently received the highest award for customer satisfaction. The yachts are purchased primarily by wealthy individuals for pleasure use. Occasionally, a yacht is manufactured for purchase by a company for business purposes.
The custom yacht industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity. For instance, West Coast Yachts will spend 80 to 100 hours on hand-buffing the stainless steel stem-iron, which is the metal cap on the yacht’s bow that conceivably could collide with a dock or another boat.
To get Dan started with his analyses, Larissa has provided the following financial statements. Larissa has gathered the industry ratios for the yacht manufacturing industry.

1. Calculate all of the ratios listed in the industry table for West Coast Yachts. page 91 2. Compare the performance of West 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 West Coast Yachts compare to the industry average?
3. Calculate the sustainable growth rate of West Coast Yachts. Calculate external funds needed (EFN) and prepare pro forma income statements and statements of financial position assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe?
4. As a practical matter, West Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners do not want to dilute their existing ownership and cent next year. What are your conclusions and recommendations about the feasibility of West Coast’s expansion plans?
5. Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, non-current assets often must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case a company has a ‘staircase’ or ‘lumpy’ fixed cost structure. Assume that West Coast Yachts is currently producing at 100 per cent of capacity. As a result, to expand production, the company must set up an entirely new line at a cost of £25,000,000.
Calculate the new EFN with this assumption. What does this imply about capacity utilization for West Coast Yachts next year?

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Operating revenues Operating expenses Operating profit Depreciation Other non-operating expenses Interest Profit before taxes Taxes (28%) Profit for period attributable to equity holders Dividends Addition to retained earnings WEST COAST YACHTS Income Statement 2015 6,957,360 4,638,240 128,700,000 90,700,000 38,000,000 4,200,000 15,380,000 2,315,000 16,105,000 4,509,400 11,595,600