Use the information from Ratios and Financial Planning at East Coast Yachts" below to answer the following questions. 1. Calculate all of the ratios listed in the industry table for East Coast Yachts. 2. Compare the financial ratios of East Coast Yachts to the industry as a whole by the following categories. a) Short-term solvency or liquidity measures b) Long-term solvency measures c) Asset management or turnover measures d) Profitability measures Also comment on the performance of each category (a) to (d) above and overall performance of East Coast Yachts based on your analyses. Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio. Ratio Good Bad Current ratio Better at managing current accounts. Quick ratio Better at managing current accounts. Total asset turnover Better at utilizing assets. May be having liquidity problems. May be having liquidity problems. Assets may be older and depreciated, requiring extensive investment soon. Could be experiencing inventory shortage. Inventory turnover Better at inventory management, Receivables turnover Better at collecting receivables. May have credit terms that are too strict. Decreasing receivables turnover may increase sales. Total debt to assets ratio Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Debt to equity ratio Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Equity multiplier Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Interest coverage Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Profit margin Less debt than industry median means the company is less likely to experience credit problems. Less debt than industry median means the company is less likely to experience credit problems. PM above the industry average means better performance than many peers. Company is performing above many of its peers. Company is performing above many of its peers. May be able to better control costs. ROA Assets may be old and depreciated relative to industry. Profit margin and equity multiplier Could still be increased, which would further increase ROE. ROE 3. Calculate the sustainable growth rate of East Coast Yachts. Prepare pro forma income statement and balance sheet. Assume that sales, cost of goods sold, other expenses, current assets (cash, accounts receivable, and inventory), fixed assets, and current liabilities (accounts payable and notes payable) grow at precisely this rate. Also assume that depreciation, interest, long-term debt, and common stock remain the same. The firm's tax rate is 25%. Compute external fund needed (EFN). (Note that the total equity used to compute the return on equity (ROE) is taken from an ending balance sheet. When you compute the sustainable growth rate, you need to use the following formula: ROExb Sustainable growth rate 1-(ROExb)' where b is the retention or plowback ratio.) (Adapted from a mini-case in Corporate Finance" by Ross, Westerfield, and Jaffe) 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 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 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 statements. Dan has gathered the industry ratios for the yacht manufacturing industry. EAST COAST YACHTS 2019 Income Statement Sales $167,310,000 Cost of goods sold 117,910,000 Other expenses 19,994,000 Depreciation 5,460,000 Earnings before interest and taxes (EBIT) $23,946,000 Interest 3,009,000 Taxable income $20,937,000 Taxes (25%) 5,234,250 Net income $15,702,750 Dividends $9,421,650 Addition to RE $6,281,100 EAST COAST YACHTS Balance Sheet as of December 31, 2019 Liabilities & Equity Assets Current assets Cash Accounts receivable Inventory Total $3,042,000 5,473,000 6,136,000 $14,651,000 Current liabilities Accounts payable Notes payable $6,461,000 13,078,000 Total $19,539,000 Fixed assets Net plant and equipment $93,964,000 Long-term debt $33,735,000 Shareholders' equity Common stock $5,200,000 Retained earnings 50,141,000 Total equity $55,341,000 Total liabilities $108,615,000 and equity Total assets $108,615,000 Yacht Industry Ratios Lower Quartile Median Upper Quartile Current ratio Quick ratio Total asset turnover Inventory turnover Receivables turnover Total debt to total assets ratio Total debt to equity ratio Equity multiplier Interest coverage Profit margin Return on assets Return on equity 0.50 0.21 0.68 4.89 6.27 0.44 0.79 1.79 5.18 4.05% 6.05% 9.93% 1.43 0.38 0.85 6.15 9.82 0.52 1.08 2.08 8.06 6.98% 10.53% 16.54% 1.89 0.62 1.38 10.89 14.11 0.61 1.56 2.56 9.83 9.87% 13.21% 26.15% Use the information from Ratios and Financial Planning at East Coast Yachts" below to answer the following questions. 1. Calculate all of the ratios listed in the industry table for East Coast Yachts. 2. Compare the financial ratios of East Coast Yachts to the industry as a whole by the following categories. a) Short-term solvency or liquidity measures b) Long-term solvency measures c) Asset management or turnover measures d) Profitability measures Also comment on the performance of each category (a) to (d) above and overall performance of East Coast Yachts based on your analyses. Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio. Ratio Good Bad Current ratio Better at managing current accounts. Quick ratio Better at managing current accounts. Total asset turnover Better at utilizing assets. May be having liquidity problems. May be having liquidity problems. Assets may be older and depreciated, requiring extensive investment soon. Could be experiencing inventory shortage. Inventory turnover Better at inventory management, Receivables turnover Better at collecting receivables. May have credit terms that are too strict. Decreasing receivables turnover may increase sales. Total debt to assets ratio Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Debt to equity ratio Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Equity multiplier Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Interest coverage Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Profit margin Less debt than industry median means the company is less likely to experience credit problems. Less debt than industry median means the company is less likely to experience credit problems. PM above the industry average means better performance than many peers. Company is performing above many of its peers. Company is performing above many of its peers. May be able to better control costs. ROA Assets may be old and depreciated relative to industry. Profit margin and equity multiplier Could still be increased, which would further increase ROE. ROE 3. Calculate the sustainable growth rate of East Coast Yachts. Prepare pro forma income statement and balance sheet. Assume that sales, cost of goods sold, other expenses, current assets (cash, accounts receivable, and inventory), fixed assets, and current liabilities (accounts payable and notes payable) grow at precisely this rate. Also assume that depreciation, interest, long-term debt, and common stock remain the same. The firm's tax rate is 25%. Compute external fund needed (EFN). (Note that the total equity used to compute the return on equity (ROE) is taken from an ending balance sheet. When you compute the sustainable growth rate, you need to use the following formula: ROExb Sustainable growth rate 1-(ROExb)' where b is the retention or plowback ratio.) (Adapted from a mini-case in Corporate Finance" by Ross, Westerfield, and Jaffe) 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 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 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 statements. Dan has gathered the industry ratios for the yacht manufacturing industry. EAST COAST YACHTS 2019 Income Statement Sales $167,310,000 Cost of goods sold 117,910,000 Other expenses 19,994,000 Depreciation 5,460,000 Earnings before interest and taxes (EBIT) $23,946,000 Interest 3,009,000 Taxable income $20,937,000 Taxes (25%) 5,234,250 Net income $15,702,750 Dividends $9,421,650 Addition to RE $6,281,100 EAST COAST YACHTS Balance Sheet as of December 31, 2019 Liabilities & Equity Assets Current assets Cash Accounts receivable Inventory Total $3,042,000 5,473,000 6,136,000 $14,651,000 Current liabilities Accounts payable Notes payable $6,461,000 13,078,000 Total $19,539,000 Fixed assets Net plant and equipment $93,964,000 Long-term debt $33,735,000 Shareholders' equity Common stock $5,200,000 Retained earnings 50,141,000 Total equity $55,341,000 Total liabilities $108,615,000 and equity Total assets $108,615,000 Yacht Industry Ratios Lower Quartile Median Upper Quartile Current ratio Quick ratio Total asset turnover Inventory turnover Receivables turnover Total debt to total assets ratio Total debt to equity ratio Equity multiplier Interest coverage Profit margin Return on assets Return on equity 0.50 0.21 0.68 4.89 6.27 0.44 0.79 1.79 5.18 4.05% 6.05% 9.93% 1.43 0.38 0.85 6.15 9.82 0.52 1.08 2.08 8.06 6.98% 10.53% 16.54% 1.89 0.62 1.38 10.89 14.11 0.61 1.56 2.56 9.83 9.87% 13.21% 26.15%