QUESTION 2 - EXTERNAL FINANCING NEEDED (10 POINTS) Dan Ervin was recently hired by East Coast Yachts to assist the company with its short term planning and also to evaluate the company's financial performance. Dan graduated from college five years ago with a finance degree, and he has been employed in the treasury department of a Fortune 500 company since then. East Coast Yachts was founded 10 years ago by Larissa Warren. The company's operations are located near Hilton Head Island, South Carolina, and the company is structured as an LLC. The company has manufactured custom midsize, high-performance yachts for clients over this period, and its products have received high reviews for safety and liability. 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 the attention to detail is a necessity. To get Dan started with his analyses, Larissa has provided the following financial statements: 2 Page East Coast Yachts Income Statement (2015) EAST COAST YACHTS 2015 Income Statement Sales Cost of goods sold Other expenses Depreciation Earnings before interest and taxes (EBIT) Interest Taxable income Taxes (40%) Net income $210,900,000 148,600,000 25,192,000 6,879,000 $ 30,229,000 3,791,000 $ 26,438,000 10,575,200 $ 15,862,800 Dividends Add to RE $ 4,759,301 $11,103,499 East Coast Yachts Balance Sheet (2015) EAST COAST YACHTS Balance Sheet as of December 31, 2015 Assets Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment $ 3,285,600 5,910,800 6,627,300 $15,823,700 Liabilities & Equity Current liabilities Accounts payable $ 6,977,700 Notes payable 14,342,600 Total $ 21,320,300 Long-term debt $ 36,400,000 $101,481,200 Shareholders' equity Common stock Retained earnings Total equity Total liabilities and equity $ 5,580,000 54,004,600 $ 59,584,600 $117,304,900 Total assets $117,304,900 East Coast Yachts is planning a growth rate of 20%. What is the External Financing Needed when sales grow at a rate of 20%? Derive the Pro-Forma Income Statement and Balance Sheet. To find the External Financing Needed, assume that costs and other expenses vary directly with sales, but depreciation and interest expense are not affected by any change in the sales' level. It takes time for the initial investment to depreciate, so, to simplify the analysis, we are going to assume that depreciation is unaffected by changes in sales. Similarly, the payment to bondholders is fixed in any period. Further, assume that all assets (i.e., current and fixed) vary directly with sales. Regarding the current liabilities, since we are considering a regular growth rate of assets, only accounts payable respond to a change in sales. Finally, use the same assumptions used in class for long-term debt and equity. More in detail, assume that long-term liabilities do not change with a change in sales as they strongly depend upon managerial decisions that take time to be approved and thus be effective. The change in equity will be driven by the change in accumulated retained earnings
