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 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 reliability. The company's yachts also have 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 business 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 example, 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. Sales EAST COAST YACHTS 2022 Income Statement Cost of goods sold Other expenses Depreciation Earnings before interest and taxes (EBIT) Interest Taxable income Taxes (21%) Net income Dividends Additions to retained earnings $6,340,000 7,537,140 $185,250,000 136,125,000 22,169,000 6,054,000 $ 20,902,000 3,336,000 $ 17,566,000 3,688,860 $ 13,877,140 EAST COAST YACHTS Balance Sheet as of December 31, 2022 Assets Liabilities and Equity Current assets Current liabilities Cash $ 2,891,400 Accounts payable $ 5,582,200 Accounts receivable 5,201,500 Notes payable 12,621,500 Inventory 5,832,100 Total $ 18,203,700 Total $ 13,925,000 Fixed assets Long-term debt $ 32,100,000 Net plant and equipment $ 89,303,400 Shareholders' equity Common stock $ 4,912,000 Retained earnings 48,012,700 Total equity $ 52,924,700 Total assets $103,228,400 Total liabilities and equity $103,228,400 Yacht Industry Ratios Lower Quartile Median Upper Quartile Current ratio .50 1.43 1.89 Quick ratio .21 .38 .62 Total asset turnover .68 .85 1.38 Inventory turnover 6.85 9.15 16.13 Receivables turnover 6.27 11.81 21.45 Debt ratio .44 .52 .61 Debt-equity ratio .79 1.08 1.56 Equity multiplier 1.79 2.08 2.56 Interest coverage 5.18 8.06 9.83 Profit margin 4.05% 6.98% 9.87% Return on assets 6.05% 10.53% 15.83% Return on equity 9.93% 16.54% 28.14% 1. Calculate all of the ratios listed in the industry table for East Coast Yachts. 2. 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 do you interpret this ratio? How does East Coast Yachts compare to the industry average? 3. Calculate the sustainable growth rate of East Coast Yachts. Calculate 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?