1. 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?

ratios for the yacht manufacturing industry.

Table Summary: This table contains two tables stacked vertically. In the top table, row 1 is a header and spans all columns. In the bottom table, row 1 is a header and spans all columns. Row 2 contains no data in columns 2 and 4. Rows 6 and 7 contain no data in columns 3 and 4. Row 8 contains no data in column 2. Rows 10 and 11 contain no data in columns 3 and 4. Row 12 contains no data in column 4. Rows 14 and 15 contain no data in columns 1 and 2.

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 17,963,000 EBIT $69,498,000 Interest expense 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

EAST COAST YACHTS 2020 Balance Sheet
Current assets		Current liabilities
Cash and equivalents	$10,107,000	Accounts payable	$40,161,400
Accounts receivable	16,813,300	Accrued expenses	5,723,700
Inventory	18,135,700	Total current liabilities	$45,855,100
Other	1,054,900
Total current assets	$46,110,900
Fixed assets		Long-term debt	$152,374,000
Property, plant, and equipment	$412,032,000	Total long-term liabilities	$152,374,000
Less accumulated depreciation	(102,452,000)
Net property, plant, and equipment	$309,580,000
Intangible assets and others	6,772,000	Stockholders’ equity
Total fixed assets	$316,352,000	Preferred stock	$ 1,773,000
		Common stock	31,802,000
		Capital surplus	27,348,000
		Accumulated retained earnings	146,052,800
		Less treasury stock	(42,772,000)
		Total equity	$164,203,800
Total assets	$362,462,900	Total liabilities and shareholders’ equity	$362,462,900

YACHT INDUSTRY RATIOS
	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
Debt-equity 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%