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
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 companys 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 companys 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 companys 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 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 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 yachts bow that conceivably could collide with a dock or another boat. To get Dan started with his analyses, Larissa has provided the following financial statements. Dan has gathered the industry ratios for the yacht manufacturing industry.
EAST COAST YACHTS 2015 Income Statement
Sales $ 210,900,000 Cost of goods sold 148, 600, 000 Other expenses 25, 192, 000 Depreciation 6,879,000 Earnings before interest and taxes (EBIT)$ 30,229,000 Interest 3, 791, 000Taxable income $ 26,438,000 Taxes (40%) 10, 575, 200 Net income 15,862,800 Dividends 4,759,301 Add to RE $ 11,103,499
EAST COAST YACHTS Balance Sheet as of December 31, 2015
Assets
Current Assets
Current Liabilities
Cash $ 3,285,600
Accounts receivable 5,910,800
Inventory 6,627,300
Total $ 15,823,700
Fixed assets Net plant and equipment $ 101,481,200
Total assets $ 117,304,900
Liabilities & Equity
Accounts payable $ 6,977,700.
Notes payable 14,342,600
Total $ 21,320,300
Long-term debt $ 36,400,000
Shareholders equity
Common stock $ 5,580,000
Retained earnings 54,004,600
Total equity $ 59,584,600
Total liabilities and equity $117,304,900
Yacht Industry Ratios
Lower Quartile Median Upper Quartile
Current ratio 0.50 1.43 1. 89 0. 62
Quick ratio 0.21 0.38 0. 62
Total asset turnover 0.68 0.85 1. 38
Inventory turnover 6.85 9.15 16. 13 2. 56 9. 83 9. 87% 15. 83% 28. 14%
Receivables turnover 6.27 11.81 21. 45
Debt ratio 0.44 0.52 0. 61
Debtequity ratio 0.79 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.
3. 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?
4. As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners dont 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 Coasts expansion plans?
5. How much interest and principal would they pay after 10 years? What would the figures be at the end of the loan period and how much would they save in taxes in total?
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