Case 1 – Ratios and Financial Planning
[Chapter 3, page 81]

In 1969, Tom Warren founded East Coast Yachts. The company’s operations are located near Hilton Head Island, South Carolina, and the company is structured as a sole proprietorship. The company has manufactured custom midsize, high-performance yachts for clients, 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.

Several years ago, Tom retired from the day-to-day operations of the company and turned the operations of the company over to his daughter, Larissa.

Because of the dramatic growth at East Coast Yachts, Larissa decided that the company should be reorganized as a corporation and, today, the company is publicly traded under the ticker symbol “ECY.”

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.

The company’s past growth has been somewhat hectic, in part due to poor planning. In anticipation of future growth, Larissa has asked Dan to analyze the company’s cash flows. The company’s financial statements are prepared by an outside auditor.

After Dan’s analysis of East Coast Yachts’ cash flow (at the end of our previous chapter), Larissa approached Dan about the company’s performance and future growth plans. First, Larissa wants to find out how East Coast Yachts is performing relative to its peers. Additionally, she wants to find out the future financing necessary to fund the company’s growth. In the past, East Coast Yachts experienced difficulty in financing its growth plan, in large part because of poor planning. In fact, the company had to turn down several large jobs because its facilities were unable to handle the additional demand. Larissa hoped that Dan would be able to estimate the amount of capital the company would have to raise next year so that East Coast Yachts would be better prepared to fund its expansion plans.

To get Dan started with his analyses, Larissa provided the following financial statements. Dan then gathered the industry ratios for the yacht manufacturing industry.

East Coast Yachts
2023 Income Statement
Item

Income

Sales

$495,381,600

Cost of goods sold

$357,466,500

Selling, general, and administrative

$ 59,200,300

Depreciation

$ 16,166,700

EBIT

$ 62,548,100
Interest expense

$ 8,910,000
EBT

$ 53,638,100
Taxes (25%)

$ 13,409,525
Net Income

$ 40,228,575
Dividends

$ 17,437,050
Retained earnings

$ 22,791,525
East Coast Yachts
2023 Balance Sheet
Current Assets

Amount

Current Liabilities

Amount

Cash and equivalents

$ 9,096,300

Accounts payable

$ 36,146,575

Accounts receivable

$ 15,131,900

Accrued expenses

$ 5,151,400

Inventory

$ 16,322,100
Total current liabilities

$ 41,297,975
Other

$ 949,400
Total current assets

$ 41,499,700
Fixed assets

Long-term debt $137,200,000
Property, plant, and equipment

$370,828,800 Total long-term liabilities $137,200,000
Less accumulated depreciation

(92,206,700)
Net property, plant, and equipment

$278,622,100
Intangible assets and others

$ 6,094,800
Stockholders’ equity
Total fixed assets

$284,716,900
Preferred stock $ 1,595,700
Common stock $ 29,057,000
Capital surplus $ 24,178,000
Accumulated retained earnings $131,382,725
Less treasury stock (38,494,800)
Total equity $ 147,718,625
Total assets

$326,216,600
Total liabilities and shareholders’ equity $326,216,600
Yacht Industry Ratios
Ratio

Lower Quartile

Median

Upper Quartile

Current ratio

.86

1.51

1.97

Quick ratio

.43

.75

1.01

Total asset turnover

1.10

1.27 1.46
Inventory turnover

12.18 14.38 16.43
Receivables turnover

10.25 17.65 22.43
Debt ratio

.32 .56 .61
Debt-equity ratio

.83 1.13 1.44
Equity multiplier

1.83 2.13 2.44
Interest coverage

5.72 8.21 10.83
Profit margin

5.02% 7.48% 9.05%
Return on assets

7.05% 10.67% 14.16%
Return on equity

14.06% 19.32% 26.41%
Assignment Directions
Write a case analysis of 2,000 – 2,500 words (8 to 10 pages), content (title page and reference page not included) in proper APA format, covering the following requirements:

East Coast Yachts uses a small percentage of preferred stock as a source of financing. In calculating the ratios for the company, should preferred stock be included as part of the company’s total equity?
Calculate all of the ratios listed in the industry table for East Coast Yachts for 2023. (Use Excel to do the calculations, then copy and paste them into your paper).
Compare the performance of East Coast Yachts to the industry as a whole. For each ratio, use decision criteria and 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 would you interpret this ratio? How does East Coast Yachts compare to the industry average for this ratio?
Calculate the sustainable growth rate for East Coast Yachts. Calculate external funds needed (EFN) and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate all of the ratios in the previous question given these new criteria. What does your analysis conclude? (Use Excel to do the calculations, then copy and paste them into your paper).
As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the shareholders don’t 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 Coast’s expansion plans?
Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, fixed assets often must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume that East Coast Yachts is currently producing at 100 percent of capacity and sales are expected to grow at 20 percent. As a result, to expand production, the company must set up an entirely new line at a cost of $75 million. Prepare the pro forma income statement and balance sheet given these new criteria. What is the new EFN with these assumptions? What does this imply about capacity utilization for East Coast Yachts next year? (Use Excel to do the calculations, then copy and paste them into your paper).
Submission Guidelines
Prepare this Assignment according to the APA guidelines, including a title page, an introduction, and a conclusion. An abstract is not required. Use in-text citations and include a References section. A template is included in the Resources and Supports.
In your report, make certain that you include at least three (3) credible outside references from search engines or scholarly sources from the APUS Online Library.
Note that your attached paper will automatically be submitted to Turnitin, and an Originality Report should be sent back to the classroom within around 15 minutes. The Originality report does not actually recommend changes. It does point out where you may need to add a citation or quotation marks (if not already cited). Once you use it a few times, you will appreciate this tool, as it will assist you in improving quality and content, as well as avoiding plagiarism. Your goal is to keep direct quotations to a minimum and to make sure that you do not just cut and paste material. Ensure that all your references are cited.  Students should strive for a TII report with a similarity index of less than 20%.
In the Assignment dropbox, please attach your paper as a file; do not copy & paste. Submit your assignment by 11:59 pm ET, Day 7 (Sunday).
Your paper will be evaluated according to the Writing Assignment Grading Rubric shown below. To maximize your grade, be sure to use the proper organization (intro, body, conclusion) and follow APA style. Your paper should have a title page and reference page, but you do not need an abstract for this assignment. See the PowerPoint presentation attached for APA assistance.

This paper will be graded according to the FINC Graduate Grading Paper Rubric

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