Calculate All of The Ratios Listed in The Industry Table For East Cost Yachts

1.
Calculate all of the ratios listed in the industry table for East Cost
Yachts.
Ans.
Ratios Calculation
a) Current Ratio
b) Quick Ratio
c) Total Asset Turnover
d) Inventory Turnover
e) Receivables Turnover
f) Debt Ratio
g) Debt to Equity Ratio
h) Equity Multiplier
i) Interest Coverage
j) Profit Margin
k) Return on Assets
l) Return on Equity
2006
0.75
0.44
1.54
19.22
30.57
0.49
0.96
1.96
7.96
7.51%
11.57%
22.70%
Working Notes:
a) Current ratio = $11,270,000 / $15,030,000
= 0.75 times
b) Quick ratio = ($11,270,000 4,720,000) / $15,030,000
= 0.44 times
c) Total asset turnover = $128,700,000 / $83,550,000
= 1.54 times
d) Inventory turnover = $90,070,000 / $4,720,000
= 19.22 times
e) Receivables turnover = $128,700,000 / $4,210,000
= 30.57 times
f) Total debt ratio = ($83,550,000 42,570,000) / $83,550,000
= 0.49 times
g) Debt-equity ratio = ($15,030,000 + 25,950,000) / $42,570,000
= 0.96 times
h) Equity multiplier = $83,550,000 / $42,570,000
= 1.96 times
i) Interest coverage = $18,420,000 / $2,315,000
= 7.96 times
j) Profit margin = $9,663,000 / $128,700,000
= 7.51%
k) Return on assets = $9,663,000 / $83,550,000
= 11.57%
l) Return on equity = $9,663,000 / $42,570,000
= 22.70%
2. Compare the performance of East Cost Yacht to the industry as a hole.
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 Cost Yacht compare to the industry
average?
The liquidity ratio of East Coast is below the industrial average for current ratio. This means
that its liquidity is lower as compared to industry, however, the current ratio is above the
lower quartile, and this indicates that there are companies with still lower liquidity than
East Coast. This is negative since the liquidity is less than the industry
The turnover ratios are all higher than the industry median. The ratios are in the above
quartile. This would imply that east coast is more efficient in the use of assets as compared
to industry average. This is positive.
The financial leverage ratios are all below the industry median though they are above the
lower quartile. This implies that East Coast Yachts has less debt than the industry average
companies. This is positive
The profit margin for the company is about the same as the industry median, the ROA is
slightly higher than the industry median, and the ROE is quite above the industry median.
East Coast Yachts seems to be performing well in the profitability area. This is positive.
Overall, East Coast Yachts performance seems good, although the liquidity ratios indicate
that a closer look may be needed in this area.
Inventory / Current Liabilities. This ratio would imply the amount of current liabilities that
can be paid for from the sale of inventory. The ratio for East Coast is 0.31. Since the
industry average is not known for this ratio, it cannot be compared.
3. Calculate the sustainable growth rate of East Cost Yachts. Calculate
external fund needed and prepare pro forma income statement and
balance sheets assuming growth at precisely this rate. Recalculate the
ratios in the previous questions? What do you observe?
The sustainable growth rate is given as
SGR = Return on equity X Retention ratio

Return on equity = Net Income/Total Equity
ROE is calculated as 22.7%
Retention ratio = 3,865,200/9,663,000= 40%
SGR = 22.7%X0.4 = 9.08%
EFN = Increase in Assets Increase in spontaneous liabilities retained earnings
Increase in assets = 7,586,034
Increase in spontaneous liabilities = 451,258
Retained earnings = 4,266,592
EFN = 2,868,184
Ratios Calculation
a) Current Ratio
b) Quick Ratio
c) Total Asset Turnover
d) Inventory Turnover
e) Receivables Turnover
f) Debt Ratio
g) Debt to Equity Ratio
h) Equity Multiplier
i) Interest Coverage
j) Profit Margin
k) Return on Assets
l) Return on Equity
2006
0.75
0.44
1.54
19.22
30.57
0.49
0.96
1.96
7.96
7.51%
11.57%
22.70%
4. As a practical matter, East Coast Yacht is unlikely to be willing to raise

external equity capital, in part because the owners dont want to dilute
their existing ownership and control positions. However, ECY is
planning for a growth rate of 20% net year. What are your conclusions
and recommendations about the feasibility of ECY expansion plans?
The growth rate of 20%indicates that the EFN is $10,966,640. Taking on so much debt
would result in the debt to equity increasing to 1.12 and the debt ratio to increase to 0.53.
The EBIT, assuming an interest rate of 6%, would be 7.84. While the financing from the
debt look alright, this would constrain further issue of debt since the debt to equity is
already above 1. Further expansion may not be possible by debt.
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 since it is impossible, as a
practical matter, to buy part of a new plant of machine. In this case, a
company has a staircase or lumpy fixed cost structure. Assume
that East Coast Yachts is currently producing at 100% of capacity. As a
result, to expand production, the company must set up an entirely new
line at a cost of $25,000,000. Calculate the new EFN with this
assumption. What does this imply about capacity utilization for East
Coast Yachts next year?
Increase in fixed assets at SGR was 6,562,759. The new plant would cost $25,000,000. The
additional EFN would be $18,437,241. The total EFN would become $21,305,424. This
would imply that the capacity utilization would be lower next year, since the new plant
would expand capacity much more than the required under SGR.

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1.

SGR = Return on equity X Retention ratio

4. As a practical matter, East Coast Yacht is unlikely to be willing to raise

5. Most assets can be increased as a percentage of sales. For instance,

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