East coast yachts case study Essay

ASSIGNMENT FOR MANAGERIAL ACCOUNTING AND FINANCE
RATIOS AND FINANCIAL PLANNING AT EAST COAST YACTHS

1. Calculated all of the ratios listed in the industry table for East Coast Yachts.

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Current Ratio = Current Asset / Current Liabilities
= $14,651,000.00 / $ 19,539,000
= 0.749 @ 0.75 ( Lower Quartile)

Quick Ratio = (Current Asset – Inventory) / Current Liability
= ($14,651,000 – $6,136,000) / $19,539,000
= $8,515,000 / $19,539,000
= 0.436 @ 0.44 (Median)

Total Asset Turnover = Sales / Total Assets
= $167,310,000 / $108,615,000
= 1.540 @ 1.54 (Upper Quartile)

Inventory Turnover = Cost of Goods Sold / Inventory
= $117,910,000 / $6,136,000
= 19.216 @ 19.22 (Upper Quartile)

Receivables Turnover = Sales / Accounts Receivable
= $167,310,000 / $5,473,000
= 30.570 @ 30.57 (Upper Quartile)

Debt Ratio @ Total Debt Ratio = (Total Asset – Total Equity) / Total Asset
= ($108,615,000 – $55,341,000) / $108,615,000
= $53,274,000 / $108,615,000
= 0.490 @ 0.49 (Lower Quartile)

Debt-equity Ratio = Total Debt / Total Equity
= $33,735,000 / $55,341,000
= 0.609 / 0.61 (Lower Quartile?)

Equity Multiplier = Total Asset / Total Equity
= $108,615,000 / $55,341,000
= 1.962 @ 1.96 (Lower Quartile)

Interest Coverage = Earnings Before Interest and Taxes (EBIT) / Interest Expense
= (Revenue – Operating Expenses) / Interest Expense
= $23,946,000 / $3,009,000
= 7.958 @ 7.96 (Lower Quartile)

Profit Margin = Net Income / Sales
= $12,562,200 / $167,310,000
= 0.075 @ 0.08 x 100
=7.51% (Median)
Return of Assets = Net Income / Total Assets
= $12,562,200 / $108,615,000
= 0.116 @ 0.12 x 100
= 11.57% (Median)

Return on Equity = Net Income / Total Equity
= $12,562,200 / $55,341,000
= 0.227 @ 0.23 x 100
= 22.7% (Median, 3.45% below upper quartile)

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?

Inventory Ratio = Inventory / Current Liabilities
= 6,136,000 / $19,539,000
= 0.314 @ 0.31

3. Calculate the sustainable growth rate of East Coast Yachts. Calculate external funds needed (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?

Sustainable growth rate =ROE x (1- dividend payout ratio)
ROE = (Net Income / Total Equity)

Sustainable growth rate = (Net Income / Total equity) x (1 – (dividends / net income))
= ($12,562,200 / $55,341,000) x (1 – ($7,537,320 / $12,562,200))
= 0.227 x (1 – 0.6)
= 0.227 x 0.4
= 0.0908 @ 9.08%

External Funds Needed (EFN) = Total Assets – (Total Liabilities + Equity)
= $108,615,000 – ($33, 735,000 + $55,341,000)
= $108,615,000 – $89,076,000
= $19,539,000

Pro Forma Income Statement

Cost of goods sold = $117,910,000 = 70.47%
Sales $167,310,000

Other Expenses = $19,994,000 = 11.95%
Sales $167,310,000

Depreciation = $5,460,000 = 3.23%
Sales $167,310,000

Interest = $3,009,000 = 1.79%
Sales $167,310,000

EBIT = $23,946,000 = 14.31%
Sales $167,310,000

Taxable Income = $20,937,000 =12.51%
Sales $167,310,000

East Coast Yachts
Pro Forma Income Statement

Sales$182,702,520.00
Cost of goods sold$128,757,773.94
Other expenses$ 21,832,951.14
Depreciation$ 5,956,102.15
Earnings before interest and taxes (EBIT)$ 26,144,730.61
Interest$ 3,288,645.36
Taxable income$ 22,856,085.25
Taxes (40%)$ 9,142,434.10
Net income$ 13,713,651.15
Dividends$7,537,320
Addition RE$5,024,880

East Coast Yachts
Pro Forma Balance Sheet

AssetsLiabilities & Equity
Current assetsCurrent liabilities
Cash$3,042,000.00 Accounts payable$33,733,409.20 Accounts receivable$5,970,670.59 Notes payable$13,078,000.00 Inventory$6,136,000.00
Total$15,148,670.59 Total$46,811,409.20

Fixed assetsLong-term debt$33,735,000.00
Net plant & equipment $88,007,897.85
Shareholder’s equity
Common stock$ 5,200,000.00
Retained earnings$21,285,829.60
Total equity$26,485,829.60
Total assets$103,156,568.44Total liabilities and equity $103,156,568.44

Ratio
Ratios
Previous Ratio
New Ratio
Current Ratio= Current Asset / Current Liabilities
= $14,651,000.00
$ 19,539,000
= 0.749 @ 0.75 ( Lower Quartile)
0.324 @ 0.32 (Lower Quartile)
Quick Ratio= (Current Asset – Inventory) / Current Liability

= ($14,651,000 – $6,136,000)
/ $19,539,000
= $8,515,000 / $19,539,000
= 0.436 @ 0.44 (Median)
0.193 @ 0.19 ( Lower Quartile)
Total Asset Turnover= Sales / Total Assets
= $167,310,000 / $108,615,000
= 1.540 @ 1.54 (Upper Quartile)
1.77 (Upper Quartile)
Inventory Turnover= Cost of Goods Sold / Inventory
= $117,910,000 / $6,136,000
= 19.216 @ 19.22 (Upper Quartile)

20.98 (Upper Quartile)

Receivables Turnover= Sales / Accounts Receivable
= $167,310,000 / $5,473,000
= 30.570 @ 30.57 (Upper Quartile)

30.6 (Upper Quartile)

Debt Ratio @ Total Debt Ratio= (Total Asset – Total Equity) / Total Asset = ($108,615,000 – $55,341,000) / $108,615,000
= $53,274,000 / $108,615,000
= 0.490 @ 0.49 (Lower Quartile)
0.743 (Upper Quartile)

Debt-equity Ratio = Total Debt / Total Equity
= $33,735,000 / $55,341,000
= 0.609 / 0.61 (Lower Quartile?)
1.27 (Median)
Equity Multiplier = Total Asset / Total Equity
= $108,615,000 / $55,341,000
= 1.962 @ 1.96 (Lower Quartile)

3.895 (Upper Quartile)

Interest Coverage = Earnings Before Interest and Taxes (EBIT) / Interest Expense = $23,946,000 / $3,009,000
= 7.958 @ 7.96 (Lower Quartile
7.949 @7.95 (Lower Quartile)

Profit Margin = Net Income / Sales

= $12,562,200 / $167,310,000
= 0.075 @ 0.08 x 100
=7.51% (Median)

0.075 (Median)
Return of Assets = Net Income / Total Assets

= $12,562,200 / $108,615,000
= 0.116 @ 0.12 x 100
= 11.57% (Median)

0.133 (Median)
Return on Equity = Net Income / Total Equity

= $12,562,200 / $55,341,000
= 0.227 @ 0.23 x 100
= 22.7% (Median, 3.45% below upper quartile

0.5177 (Lower Quartile)

4. As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners don’t want to dilute their existing owner-ship 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?

EFN= (Assets/Sales x ∆Sales) – (Spontaneous liabilities/Salesx ∆Sales) – [Profit Margin x Projected Sales x (1-d)] =(103,156,568.44/167310000 x 15392520) – (6461000/167310000 x 15392520) – [0.075 x 182702520 x (1- 3/2)] = $15,747,336.79

Based on the calculation that has been made, the value of latest EFN after the growth of 20% have dropped from $19,539,000 to $15,747,336.79. It has shown that East Coast Yachts has a reduction of $ 3,791,663.21 in EFN during 2013 compare to EFN during 2012. Therefore, this plan is feasible to execute the growth rate of 20% in sales next year.

5. 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. As a result, to expand production, the company must set up an entirely new line at a cost of $30million. Calculate the new EFN with this assumption. What does this imply about capacity utilization for East Coast Yachts next year??

EFN= (Assets/Sales x ∆Sales) – (Spontaneous liabilities/Salesx ∆Sales) – [Profit Margin x Projected Sales x (1-d)] =(118007897.9/167310000 x 15392520) – (6461000/167310000 x 15392520) – [0.075 x 182702520 x (1- 3/2)]

= $ 17,113,107,11

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