After Dans analysis of East Coast Yachts cash flow (at the end of our previous chapter), Larissa approached Dan about the companys performance and future growth plans. First, Larissa wants to find out how East Coast Yachts is performing relative to its peers. Additionally, she wants to find out the future financing necessary to fund the companys growth. In the past, East Coast Yachts experienced difficulty in financing its growth plan, in large part because of poor planning. In fact, the company had to turn down several large jobs because its facilities were unable to handle the additional demand. Larissa hoped that Dan would be able to estimate the amount of capital the company would have to raise next year so that East Coast Yachts would be better prepared to fund its expansion plans.

To get Dan started with his analyses, Larissa provided the following financial statements. Dan then gathered the industry ratios for the yacht manufacturing industry

EAST COAST YACHTS 2017 Income Statement
Sales	$611,582,000
Cost of goods sold	431,006,000
Selling, general, and administrative	73,085,700
Depreciation	19,958,400
EBIT	$ 87,531,900
Interest expense	11,000,900
EBT	$ 76,531,000
Taxes	30,612,400
Net income	$ 45,918,600
Dividends	$ 17,374,500
Retained earnings	$ 28,544,100

EAST COAST YACHTS 2017 Balance Sheet
Current assets		Current liabilities
Cash and equivalents	$ 11,119,700	Accounts payable	$ 44,461,550
Accounts receivable	18,681,500	Accrued expenses	6,123,200
Inventory	20,149,650	Total current liabilities	$ 50,584,750
Other	1,172,200
Total current assets	$ 51,123,050
Fixed assets		Long-term debt	$169,260,000
Property, plant, and equipment	$457,509,600	Total long-term liabilities	$169,260,000
Less accumulated depreciation	(113,845,900)
Net property, plant, and equipment	$343,663,700
Intangible assets and others	6,772,000	Stockholders equity
Total fixed assets	$350,435,700	Preferred stock	$ 1,970,000
		Common stock	37,583,700
		Capital surplus	28,116,300
		Accumulated retained earnings	161,564,000
		Less treasury stock	(47,520,000)
		Total equity	$181,714,000
Total assets	$401,558,750	Total liabilities and shareholders equity	$401,558,750

LOWER QUARTILE MEDIAN UPPER QUARTILE

Current ratio .86 1.51 1.97

Quick ratio .43 .75 1.01

Total asset turnover 1.10 1.27 1.46

Inventory turnover 12.18 14.38 16.43

Receivables turnover 10.25 17.65 22.43

Debt ratio .32 .56 .61

Debtequity ratio .83 1.13 1.44

Equity multiplier 1.83 2.13 2.44

Interest coverage 5.72 8.21 10.83

Profit margin 5.02% 7.48% 9.05%

Return on assets 7.05% 10.67% 14.16%

Return on equity 14.06% 19.32% 26.41%

4. Calculate the sustainable growth rate for East Coast Yachts. Calculate the EFN and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe?

Sustainable Growth Rate =
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
COGS
Other expenses
Depreciation
EBIT
Interest
Taxable income
Taxes (40%)
Net income
Dividends
Add to RE

East Cost Yachts
2017 Balance Sheet
Current Assets
Cash and equivalents
Accounts receivable
Inventory
Other
Total current assets
Fixed assets
Total assets

EFN =

New Ratio calculation:
Ratio	Lower Quartile	Median	Upper Quartile	East Coast Yachts
Current ratio	0.86	1.51	1.97
Quick ratio	0.43	0.75	1.01
Total asset turnover	1.10	1.27	1.46
Inventory turnover	12.18	14.38	16.43
Receivables turnover	10.25	17.65	22.43
Debt ratio	0.32	0.56	0.61
Debt-equity ratio	0.83	1.13	1.44
Equity multiplier	1.83	2.13	2.44
Interest coverage	5.72	8.21	10.83
Profit margin	5.02%	7.48%	9.05%
Return on assets	7.05%	10.67%	14.16%
Return on equity	14.06%	19.32%	26.41%

Observations: