East Coast Yachts uses a small percentage of preferred stock as a source of financing. In calculating the ratios for

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the company, should preferred stock be included as part of the company's total equity?

Calculate all of the ratios listed in the industry table for East Coast Yachts.

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 would you interpret this ratio? How does East Coast Yachts compare to the industry average for this ratio?

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

As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the shareholders don't want to dilute their existing ownership and control positions. However, East Coast Yachts is planning for a growth rate of $20$ percent next year. What are your conclusions and recommendations about the feasibility of East Coast's expansion plans?

Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, fixed 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 East Coast Yachts is currently producing at $100$ percent of capacity and sales are expected to grow at $20$ percent. As a result, to expand production, the company must set up an entirely new line at a cost of $$95,000,000.$ Prepare the pro forma income statement and balance sheet. What is the new EFN with these assumptions? What does this imply about capacity utilization for East Coast Yachts next year?

EAST COAST YACHTS

$2020$ Income Statement

Sales

$$550,424,000$

Cost of goods sold

$397,185,000$

Selling, general, and administrative $,65,778,000$

Depreciation

EBIT

$$,69,498,000$

Interest expenst

$9,900,000$

EBT

$$,59,598,000$

Taxes $(25\%)$

$14,899,500$

Net income

$$,44,698,500$

Dividends

$$,19,374,500$

Retained earnings

$25,324,000$