QUESTION:

RATIOS AND FINANCIAL PLANNING AT EAST COAST YACHTS Dan Ervin was recently hired by East Coast Yachts to assist the company with its short- term financial 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 opera- tions are located near Hilton Head Island, South Carolina, and the company is struc tured 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 reliability. The company's yachts have also recently received the highest award for customer satisfaction. The yachts are primarily purchased by wealthy individuals for pleasure use. Occasionally, a yacht is manufactured for purchase by a company for busi- ness 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, East 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 state- ments. Dan has gathered the industry ratios for the yacht manufacturing industry. EAST COAST YACHTS 2012 Income Statement Sales Cost of goods sold Other expenses Depreciation Earnings before interest and taxes (EBIT) Interest Taxable income Taxes (40%) Net income $234,300,000 165,074,000 27,991,000 7.644,000 $ 33,591,000 4,212,600 $ 29,378,400 11.751,360 $ 17.627.040 Dividends Add to RE $ 5.288,112 $12,338,928 EAST COAST YACHTS Balance Sheet as of December 31, 2012 Assets Liabilities & Equity Current assets Current liabilities Cash $ 3.650.700 Accounts payable $ 7.753,000 Accounts receivable 6,567,600 Notes payable 15,936,300 Inventory 7.363,700 Total $ 17.582.000 Total $ 23,689,300 Fixed assets Long-term debt $ 40,480,000 Net plant and equipment $112.756,900 Shareholders' equity Common stock $ 6,200,000 Retained earnings 59,969,600 Total equity $ 66,169,600 Total assets $130,338,900 Total liabilities and equity $130,338.900 Yacht Industry Ratios Lower Quartile Median Upper Quartile 0.50 0.21 0.68 6.85 1.43 0.38 0.85 9.15 11.81 6.27 Current ratio Quick ratio Total asset turnover Inventory turnover Receivables turnover Debt ratio Debt-equity ratio Equity multiplier Interest coverage Profit margin Return on assets Return on equity 1.08 0.44 0.79 1.79 5.18 4.05% 6.05% 9.93% 1.89 0.62 1.38 16.13 21.45 0.61 1.56 2.56 9.83 9.87% 15.83% 28.14% 2.08 8.06 6.98% 10.53% 16.54% As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners don't want to dilute their existing ownership and control positions. However, East Coast Yachts is planning for a growth rate of 20 per- cent next year. What are your conclusions and recommendations about the feasibility of East Coast's expansion plans? RATIOS AND FINANCIAL PLANNING AT EAST COAST YACHTS Dan Ervin was recently hired by East Coast Yachts to assist the company with its short- term financial 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 opera- tions are located near Hilton Head Island, South Carolina, and the company is struc tured 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 reliability. The company's yachts have also recently received the highest award for customer satisfaction. The yachts are primarily purchased by wealthy individuals for pleasure use. Occasionally, a yacht is manufactured for purchase by a company for busi- ness 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, East 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 state- ments. Dan has gathered the industry ratios for the yacht manufacturing industry. EAST COAST YACHTS 2012 Income Statement Sales Cost of goods sold Other expenses Depreciation Earnings before interest and taxes (EBIT) Interest Taxable income Taxes (40%) Net income $234,300,000 165,074,000 27,991,000 7.644,000 $ 33,591,000 4,212,600 $ 29,378,400 11.751,360 $ 17.627.040 Dividends Add to RE $ 5.288,112 $12,338,928 EAST COAST YACHTS Balance Sheet as of December 31, 2012 Assets Liabilities & Equity Current assets Current liabilities Cash $ 3.650.700 Accounts payable $ 7.753,000 Accounts receivable 6,567,600 Notes payable 15,936,300 Inventory 7.363,700 Total $ 17.582.000 Total $ 23,689,300 Fixed assets Long-term debt $ 40,480,000 Net plant and equipment $112.756,900 Shareholders' equity Common stock $ 6,200,000 Retained earnings 59,969,600 Total equity $ 66,169,600 Total assets $130,338,900 Total liabilities and equity $130,338.900 Yacht Industry Ratios Lower Quartile Median Upper Quartile 0.50 0.21 0.68 6.85 1.43 0.38 0.85 9.15 11.81 6.27 Current ratio Quick ratio Total asset turnover Inventory turnover Receivables turnover Debt ratio Debt-equity ratio Equity multiplier Interest coverage Profit margin Return on assets Return on equity 1.08 0.44 0.79 1.79 5.18 4.05% 6.05% 9.93% 1.89 0.62 1.38 16.13 21.45 0.61 1.56 2.56 9.83 9.87% 15.83% 28.14% 2.08 8.06 6.98% 10.53% 16.54% As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners don't want to dilute their existing ownership and control positions. However, East Coast Yachts is planning for a growth rate of 20 per- cent next year. What are your conclusions and recommendations about the feasibility of East Coast's expansion plans