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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.
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East Coast
Yachts
2023 Income Statement
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Item
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Income
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Sales
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$495,381,600
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Cost of goods sold
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$357,466,500
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Selling, general, and administrative
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$ 59,200,300
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Depreciation
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$ 16,166,700
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EBIT
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$ 62,548,100
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Interest expense
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$ 8,910,000
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EBT
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$ 53,638,100
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Taxes (25%)
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$ 13,409,525
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Net Income
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$ 40,228,575
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Dividends
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$ 17,437,050
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Retained earnings
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$ 22,791,525
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East Coast Yachts
2023 Balance Sheet
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Current Assets
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Amount
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Current Liabilities
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Amount
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Cash and equivalents
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$ 9,096,300
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Accounts payable
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$ 36,146,575
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Accounts receivable
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$ 15,131,900
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Accrued expenses
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$ 5,151,400
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Inventory
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$ 16,322,100
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Total current liabilities
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$ 41,297,975
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Other
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$ 949,400
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Total current assets
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$ 41,499,700
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Fixed assets
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Long-term debt
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$137,200,000
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Property, plant, and equipment
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$370,828,800
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Total long-term liabilities
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$137,200,000
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Less accumulated depreciation
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(92,206,700)
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Net property, plant, and equipment
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$278,622,100
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Intangible assets and others
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$ 6,094,800
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Stockholders’ equity
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Total fixed assets
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$284,716,900
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Preferred stock
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$ 1,595,700
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Common stock
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$ 29,057,000
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Capital surplus
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$ 24,178,000
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Accumulated retained earnings
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$131,382,725
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Less treasury stock
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(38,494,800)
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Total equity
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$ 147,718,625
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Total assets
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$326,216,600
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Total liabilities and shareholders’ equity
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$326,216,600
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Yacht Industry Ratios
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Ratio
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Lower Quartile
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Median
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Upper Quartile
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Current ratio
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.86
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1.51
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1.97
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Quick ratio
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.43
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.75
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1.01
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Total asset turnover
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1.10
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1.27
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1.46
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Inventory turnover
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12.18
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14.38
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16.43
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Receivables turnover
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10.25
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17.65
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22.43
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Debt ratio
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.32
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.56
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.61
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Debt-equity ratio
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.83
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1.13
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1.44
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Equity multiplier
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1.83
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2.13
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2.44
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Interest coverage
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5.72
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8.21
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10.83
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Profit margin
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5.02%
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7.48%
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9.05%
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Return on assets
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7.05%
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10.67%
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14.16%
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Return on equity
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14.06%
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19.32%
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26.41%
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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:
1. 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?
2. 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).
3. 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?
4. 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).
5. 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?
6. 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%.
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.
- Course Objective: 1 [content page]
- Learning Objectives: 1.4, 1.5, and 1.6 [content page]
Resources and
Supports
- Student Paper Template [Word download]
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