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Question No. 1:
Calculate all of the ratios listed in the industry table for East Coast Yachts.
Ratio Formula Calculation Answer
Current Ratio Current Assets
Current Liabilities14.651.00019.539.000
0.74 Times
Quick Ratio Current Assets−Inventory
Current Liabilities14.651.000−6.316 .000
19.539 .000
0.43 Times
Total Asset Turnover Ratio Sales
Total Assets
167.310.000108.615.000
1.54 Times
Inventory Turnover Ratio COGS
Inventory117.910 .0006.136 .000
19.2 Times
Receivable Turnover Ratio Sales
Accounts Receivable167.310.0005.437 .000
30.57 Times
Debt RatioTotal Assets−Total Equity
Total Assets108.615.000−55.342.000
108.615 .000
0.49 Times
Debt-Equity RatioTotal DebtTotal Equity
53.274 .00055.341.000
0.96 Times
Equity Multiplier Total AssetsTotal Equity 108.615.000
55.341.000
1.96 Times
Interest CoverageEBITInterest
23.946.0003.009.000
7.96 Times
Profit MarginNet Income
Sales12.562.200
167.310.000
7.5%
Return on Assets 11.5%
Net IncomeTotal Assets
12.562.200108.615.000
Return on EquityNet IncomeTotal Equity
12.562.20055.341.000
22.6%
Question No. 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?
Current Ratio
Quick Ratio
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Liquidity Ratios Comparison ( Times)
Interpretation:
Current Ratio of East Coast is high as compared to Lower Quartile means better ability to pay current liabilities but very low as compared Median and Upper Quartile which means low solvency position.
Quick Ratio is high than Lower Quartile but low than Median and Upper Quartile showing that less solvent if inventory is deducted from Current Assets.
Total Asset Turnover
Inventory Turnover
Receivables Turnover
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Turnove Ratios Comparison
Interpretation:
Total Asset Turnover Ratio is high as compared to all industry ratios which mean that East Coast is utilizing its assets very well to generate revenues.
Inventory Turnover Ratio is high as compared to all industry ratios which mean that East Coast is converting its inventory into cash maximum times a year.
Receivable Turnover Ratio is also high as compared to all industry ratios which mean that East Coast is receiving cash from receivables maximum times a year.
Debt Ratio
Debt-Equity-Ratio
Equity Multiplier
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Long Term Solvency Ratios Comparison
Interpretation:
According to Debt Ratio, East Coasts is less able to pay its liabilities than Upper and Median Quartile but more than Lower Quartile.
Debt to Equity Ratio is less than Upper and Median Quartile means portion of equity is more than debt showing good solvency position of East Coasts. And Vice Versa comparison to Lower Quartile.
Equity Multiplier shows that East Coasts equity is 1.96 times of the assets which is low as compared to Upper and Median Quartile but more than Lower Quartile.
Interest Coverage
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Coverage Ratios Comparison
Interpretation:
According to the Ratio, East Coast can pay interest payments 7.96 times which is low / not favorable than Upper and Median Quartile but high than Lower Quartile.
Profit Margin
ROA
ROE
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Profitibility Ratios Comparison
Interpretation:
Profit Margin of East Cost is high than Lower Quartile and Median showing high return on sale but low as compared to Upper Quartile.
Return on Assets of East Cost is high than Lower Quartile and Median mean high revenues in sale of assets but low as compared to Upper Quartile.
Return on Equity of East Cost is high than Lower Quartile and Median but low as compared to Upper Quartile.
Overall Comparison To Industry
Ratio Positive /Negative ReasonLiquidity Ratios Positive Short Term Solvency Position of East Coast is
good as compared to Industry.Turnover Ratios Positive Turnover Ratios are all positive as compared to
Industry Coverage Ratios Negative Interest Paying Ability is not very good Overall.
Long Term Solvency Ratios
Negative Long Term paying ability is not too good as compared to Industry.
Profitability Ratios Positive Al are positive as compared to Industry.
Question No. 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∗(1−DIVIDENDPAYOUT RATIO)
ROE = Net Income÷Equity
ROE = 12562200 / 55341000
= 22%
Dividend Payout = Total Dividend / Net Income
= 75, 37,320/ 125, 62,200
= 0.6
Sustainable Growth Rate = 22% * (1 - 0.6)
= 9.08%
INCOME STATEMENT FOR THE YEAR ENDED 2009
Particulars Amount By Growth Rate of 9.08%
Sales 18,25,01,748Cost of Goods Sold (12,86,16,228)Other Expenses (2,18,09,455.2)Depreciation (No Change) (5,460,000)
EBIT 26616064.8Interest (No Change) (3,009,000)
Taxable Income 2360,70,64.8Taxes (40%) (94,42,826)
Net Income 14,16,42,39Dividends 88,21,708.6Addition to RE 53,42,530
BALANCE SHEET AS ON 2009
Assets Amount Liabilities & Equity Amount
Current Asset Current LiabilityCash 33,18,213.6 Account Payable 70,47,658.8Account Receivables 59,69,948.4 Notes Payable 1,42,65,482.4Inventory 66,93,148.8 Total Current Liability 2,13,13,141.2
Total Current Asset 1,29,81,301.8
Fixed AssetsLong Term Debt (No Change)
3,37,35,000
Net Plant & Equipment 10,24,95,931.2
SHAREHOLDER'S EQUITY
Common Stock 56,72 160Retained Earnings 5,56,93,802.8
Total Equity 6.03.65,962.8
Total Assets 11,84,77,242 Total Liabilities & Equity 11,54,14,104
Calculation of External Fund Needed:
External Funds needed will be the value that a firm needs to take loan. Here Long Term Debt is constant so External Fund Needed will be calculated as follows:
External Fund Needed = Total Assets – Total Liabilities & Equity
= 11,84,77,242 - 11,54,14,104
= 30, 63,186
RATIO ANALYSIS WITH SUSTAINABLE GROWTH RATE OF 9.08%
Ratio Formula Calculation AnswerCurrent Ratio
Current AssetsCurrent Liabilities
1,29,81,301.82,13,13,141.2
0.60 Times
Quick Ratio Current Assets−Inventory
Current Liabilities1,29,81,301.8−66,93,148.8
2,13,13,141.2
0.29 Times
Total Asset Turnover Ratio Sales
Total Assets
18,25,01,74811,84,77,242
1.54 Times
Inventory Turnover Ratio COGS
Inventory12,86,16,22866,93,148.8
19.2 Times
Receivable Turnover Ratio Sales
Accounts Receivable18,25,01,74859,69,948.4
30.57 Times
Debt RatioTotal Assets−Total Equity
Total Assets11,84,77,242−6.03 .65,962.8
11,84,77,242
0.49 Times
Debt-Equity RatioTotal DebtTotal Equity
2,13,13,141.2+3,37,35,0006.03 .65,962 .8
0.91 Times
Equity Multiplier Total AssetsTotal Equity 11,84,77,242
6.03.65,962 .8
1.96 Times
Interest CoverageEBITInterest
26616064.83,009,000
7.96 Times
Profit MarginNet Income
Sales14,16,42,39
18,25,01,748
7.76%
Return on AssetsNet IncomeTotal Assets
14,16,42,3911,84,77,242
11.9%
Return on EquityNet IncomeTotal Equity
14,16,42,396.03.65,962 .8
23.46 %
Comparison of Ratios with and without Sustainable Growth Rate
Ratio Without Sustainable Growth Rate
With Sustainable Growth Rate (9.08%)
Effect
Current Ratio 0.74 Times
0.60 Times
A Little Bit Change
Quick Ratio 0.43 Times 0.29 Times A Large Change
Total Asset Turnover Ratio
1.54 Times 1.54 Times No Effect
Inventory Turnover Ratio
19.2 Times 19.2 Times No Effect
Receivable Turnover Ratio
30.57 Times 30.57 Times No Effect
Debt Ratio 0.49 Times 0.49 Times No Effect
Debt-Equity Ratio 0.96 Times 0.91 Times A Little Bit Change
Equity Multiplier 1.96 Times 1.96 Times No Effect
Interest Coverage 7.96 Times 7.96 Times No Effect
Profit Margin 2.5% 7.76% A Large Change
Return on Assets 11.5% 11.9% No Effect
Return on Equity 22.6% 23.46 % A Little Bit Change
0
0.02
0.04
0.06
0.08
0.1
0.12
0 0 0 0 0 0 0 0 0 0
0.025
0.115
0 0 0 0 0 0 0 0 0 0
0.0776
0.119
Without Sustainable Growth Rate With Sustainable Growth Rate (9.08%)
Analysis:
Sustainable Growth Rate which is used to check to Firm’s ability of growing without taking Loan. After calculating Sustainable Growth Rate, Long Term Debt, Interest and Dividends are kept Constant to check it. According to the above analysis, it is shown that Sustainable Growth Rate have no effect on Turnover, Coverage, Equity Multiplier Ratios and Long Term Solvency Position but have an effect on Profits and Equity Returns.
Question No. 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 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?
Here, the given Sustainable Growth Rate is 20%.Now according to that rate we will form a new Balance Sheet and Income Statement.
INCOME STATEMENT FOR THE YEAR ENDED 2009
Particulars Amount (Growth Rate 20%)
Sales 20,07,72,000Cost of Goods Sold 14,14.92,000Other Expenses 2,39,92,800Depreciation (No Change) 54,60,000
EBIT 2,98,27,200Interest (No Change) 30,09,000
Taxable Income 2,68,18,200Taxes (40%) 1,07,27,280
Net Income 1,60,90,920Dividends 96,54,552Addition to RE 64.36,368
BALANCE SHEET AS ON 2009
Assets Amount Liabilities & Equity AmountCurrent Asset Current Liability
Cash 36,50,400 Account Payable 77,53,200Account Receivables 65,67,600 Notes Payable 1,56,3,600Inventory 73,63,200 Total Current Liability 2,34,46,800
Total Current Asset 1,75,81,200
Fixed AssetsLong Term Debt (No Change)
3,37,35,000
Net Plant & Equipment 11,27,56,800
SHAREHOLDER'S EQUITY
Common Stock 52,00,000Retained Earnings 5,65,77,368
Total Equity 6,17,77,368
Total Assets13,03,38,000
Total Liabilities & Equity11,89,59,168
Calculation of External Fund Needed:
External Funds needed will be the value that a firm needs to take loan. Here Long Term Debt is constant so External Fund Needed will be calculated as follows:
External Fund Needed = Total Assets – Total Liabilities & Equity
= 13,03,38,000 - 11,89,59,168
= 1,13,78,832
Question No. 5
Conclusion:
If the East Coast Firm have a growth rate of 20% then its profit will be $ 2,68,18,200 without taking loan and extra fund they will need is of $ 1,13,78,832
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 $30 million.
Purchase of Fixed Asset will cause changes in Depreciation in Income Statement and in Total Fixed Assets in Balance Sheet.
Effect on Fixed Asset:
New Asset Purchased = 3 million New Total Fixed Assets = 93,964,000 + 30,000,000
= 12,39,64,000
Effect on Depreciation
New Depreciation will be calculated on the basis of old depreciation percentage.
Old Depreciation Percentage = 5,460,000÷93,964,000
= 5.8%
New depreciation= 12,39,64,000 * 5.8%
= 7,203,221
INCOME STATEMENT FOR THE YEAR ENDED 2009
Particulars Amount (Growth Rate 20%)
Sales 20,07,72,000Cost of Goods Sold (14,14.92,000)Other Expenses (2,39,92,800)Depreciation (72,03,221)
EBIT 2,80,83,979Interest (No Change) (30,09,000)
Taxable Income 2,50,74,979Taxes (40%) (1,00,29,992)
Net Income 1,50,44,988Dividends (96,54,552)Addition to RE 60,17,995
BALANCE SHEET AS ON 2009
Assets Amount Liabilities & Equity AmountCurrent Asset Current Liability
Cash 36,50,400 Account Payable 77,53,200Account Receivables 65,67,600 Notes Payable 1,56,3,600Inventory 73,63,200 Total Current Liability 2,34,46,800
Total Current Asset 1,75,81,200
Fixed AssetsLong Term Debt (No Change)
3,37,35,000
Net Plant & Equipment 12,39,64,000
SHAREHOLDER'S EQUITY
Common Stock 52,00,000Retained Earnings 5,65,77,368
Total Equity 6,17,77,368
Total Assets14,15,45,200
Total Liabilities & Equity11,89,59,168
Calculation of External Fund Needed:
External Funds needed will be the value that a firm needs to take loan. Here Long Term Debt is constant so External Fund Needed will be calculated as follows:
External Fund Needed = Total Assets – Total Liabilities & Equity
= 14,15,45,200 - 11,89,59,168
= 2,25,86,032
. Conclusion:
East Coast Yachts in increasing its fixed assets due to which there is cash out flow but the growth rate for all is same 5.8% which means no cash inflow. It will have to focus on generating more cash revenues to survive because debt loan is already constant