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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 14.651 .000 0.74 Times
Current Liabilities 19.539 .000

0.43 Times
Quick Ratio Current AssetsInventory 14.651 .0006.316 .000
Current Liabilities 19.539 .000

Total Asset 167.310 .000 1.54 Times


Turnover Ratio Sales 108.615 .000
Total Assets

Inventory Turnover 19.2 Times


Ratio COGS 117.910 .000
Inventory 6.136 .000

Receivable 30.57 Times


Turnover Ratio Sales 167.310 .000
Accounts Receivable 5.437 .000

Debt Ratio 0.49 Times


Total AssetsTotal Equity 108.615 .00055.342.000
Total Assets 108.615 .000

Debt-Equity Ratio 53.274 .000 0.96 Times


Total Debt 55.341.000
Total Equity

Equity Multiplier Total Assets 1.96 Times


Total Equity 108.615 .000
55.341 .000

Interest Coverage 7.96 Times


EBIT 23.946 .000
Interest 3.009 .000

Profit Margin 7.5%


Net Income 12.562 .200
Sales 167.310 .000

Return on Assets 11.5%


Net Income 12.562 .200
Total Assets 108.615 .000

Return on Equity 12.562 .200 22.6%


Net Income 55.341 .000
Total Equity

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?
Liquidity Ratios Comparison ( Times)

Quick Ratio

Current Ratio

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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.
Turnove Ratios Comparison

Receivables Turnover

Inventory Turnover

Total Asset Turnover

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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.
Long Term Solvency Ratios Comparison

Equity Multiplier

Debt-Equity-Ratio

Debt Ratio

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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.
Coverage Ratios Comparison

Interest Coverage

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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.
Profitibility Ratios Comparison

ROE

ROA

Profit Margin

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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 Reason


Liquidity 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 Negative Long Term paying ability is not too good as
Ratios 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(1DIVIDEND PAYOUT 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


Amount By Growth
Particulars Rate of 9.08%
Sales 18,25,01,748
Cost of Goods Sold (12,86,16,228)
Other Expenses (2,18,09,455.2)
Depreciation (No Change) (5,460,000)
EBIT 26616064.8
Interest (No Change) (3,009,000)
Taxable Income 2360,70,64.8
Taxes (40%) (94,42,826)
Net Income 14,16,42,39
Dividends 88,21,708.6
Addition to RE 53,42,530

BALANCE SHEET AS ON 2009

Amount Amount
Assets Liabilities & Equity
Current Asset Current Liability
Cash 33,18,213.6 Account Payable 70,47,658.8
Account Receivables 59,69,948.4 Notes Payable 1,42,65,482.4
Inventory 66,93,148.8 Total Current Liability 2,13,13,141.2
Total Current Asset 1,29,81,301.8
Long Term Debt 3,37,35,000
Fixed Assets (No Change)
Net Plant & Equipment 10,24,95,931.2
SHAREHOLDER'S
EQUITY
Common Stock 56,72 160
Retained 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 Answer


Current Ratio
Current Assets 1,29,81,301.8 0.60 Times
Current Liabilities 2,13,13,141.2

0.29 Times
Quick Ratio Current AssetsInventory 1,29,81,301.866,93,148.8
Current Liabilities 2,13,13,141.2

Total Asset 18,25,01,748 1.54 Times


Turnover Ratio Sales 11,84,77,242
Total Assets
Inventory 19.2 Times
Turnover Ratio COGS 12,86,16,228
Inventory 66,93,148.8

Receivable 30.57 Times


Turnover Ratio Sales 18,25,01,748
Accounts Receivable 59,69,948.4

Debt Ratio 0.49 Times


Total AssetsTotal Equity11,84,77,2426.03 .65,962.8
Total Assets 11,84,77,242

Debt-Equity Ratio 2,13,13,141.2+3,37,35,000 0.91 Times


Total Debt 6.03 .65,962.8
Total Equity

Equity Multiplier Total Assets 1.96 Times


Total Equity 11,84,77,242
6.03 .65,962 .8

Interest Coverage 7.96 Times


EBIT 26616064.8
Interest 3,009,000

Profit Margin 7.76%


Net Income 14,16,42,39
Sales 18,25,01,748

Return on Assets 11.9%


Net Income 14,16,42,39
Total Assets 11,84,77,242

Return on Equity 14,16,42,39 23.46 %


Net Income 6.03 .65,962 .8
Total Equity

Comparison of Ratios with and without Sustainable


Growth Rate

Ratio Without Sustainable With Sustainable Effect


Growth Rate Growth Rate
(9.08%)
Current Ratio A Little Bit
0.74 Times 0.60 Times Change
0.43 Times 0.29 Times A Large Change
Quick Ratio

Total Asset Turnover 1.54 Times 1.54 Times No Effect


Ratio

Inventory Turnover 19.2 Times 19.2 Times No Effect


Ratio

Receivable Turnover 30.57 Times 30.57 Times No Effect


Ratio

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
0.12
0.12
0.12

0.1
0.08
0.08

0.06

0.04 0.03

0.02

0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Without Sustainable Growth Rate With Sustainable Growth Rate (9.08%)

Analysis:
Sustainable Growth Rate which is used to check to Firms 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 dont
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 Coasts 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


Amount (Growth
Particulars Rate 20%)
Sales 20,07,72,000
Cost of Goods Sold 14,14.92,000
Other Expenses 2,39,92,800
Depreciation (No Change) 54,60,000
EBIT 2,98,27,200
Interest (No Change) 30,09,000
Taxable Income 2,68,18,200
Taxes (40%) 1,07,27,280
Net Income 1,60,90,920
Dividends 96,54,552
Addition to RE 64.36,368
BALANCE SHEET AS ON 2009

Assets Amount Liabilities & Equity Amount


Current Asset Current Liability
Cash 36,50,400 Account Payable 77,53,200
Account Receivables 65,67,600 Notes Payable 1,56,3,600
Inventory 73,63,200 Total Current Liability 2,34,46,800
Total Current Asset 1,75,81,200
Long Term Debt 3,37,35,000
Fixed Assets (No Change)
Net Plant & Equipment 11,27,56,800
SHAREHOLDER'S
EQUITY
Common Stock 52,00,000
Retained Earnings 5,65,77,368
Total Equity 6,17,77,368

13,03,38,000 11,89,59,168
Total Assets Total Liabilities & Equity

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

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

Question No. 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 $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


Amount (Growth
Particulars Rate 20%)
Sales 20,07,72,000
Cost of Goods Sold (14,14.92,000)
Other Expenses (2,39,92,800)
Depreciation (72,03,221)
EBIT 2,80,83,979
Interest (No Change) (30,09,000)
Taxable Income 2,50,74,979
Taxes (40%) (1,00,29,992)
Net Income 1,50,44,988
Dividends (96,54,552)
Addition to RE 60,17,995

BALANCE SHEET AS ON 2009

Assets Amount Liabilities & Equity Amount


Current Asset Current Liability
Cash 36,50,400 Account Payable 77,53,200
Account Receivables 65,67,600 Notes Payable 1,56,3,600
Inventory 73,63,200 Total Current Liability 2,34,46,800
Total Current Asset 1,75,81,200
Long Term Debt 3,37,35,000
Fixed Assets (No Change)
Net Plant & Equipment 12,39,64,000
SHAREHOLDER'S
EQUITY
Common Stock 52,00,000
Retained Earnings 5,65,77,368
Total Equity 6,17,77,368

14,15,45,200 11,89,59,168
Total Assets Total Liabilities & Equity

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