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minicase01_solution - CHAPTER 3 RATIOS AND FINANCIAL...

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CHAPTER 3 RATIOS AND FINANCIAL PLANNING AT EAST COAST YACHTS 1. The calculations for the ratios listed are: Current ratio = $11,270,000 / $15,030,000 Current ratio = 0.75 times Quick ratio = ($11,270,000 – 4,720,000) / $15,030,000 Quick ratio = 0.44 times Total asset turnover = $128,700,000 / $83,550,000 Total asset turnover = 1.54 times Inventory turnover = $90,700,000 / $4,720,000 Inventory turnover = 19.22 times Receivables turnover = $128,700,000 / $4,210,000 Receivables turnover = 30.57 times Total debt ratio = ($83,550,000 – 42,570,000) / $83,550,000 Total debt ratio = 0.49 times Debt-equity ratio = ($15,030,000 + 25,950,000) / $42,570,000 Debt-equity ratio = 0.96 times Equity multiplier = $83,550,000 / $42,570,000 Equity multiplier = 1.96 times Interest coverage = $18,420,000 / $2,315,000 Interest coverage = 7.96 times Profit margin = $9,663,000 / $128,700,000 Profit margin = 7.51% Return on assets = $9,663,000 / $83,550,000 Return on assets = 11.57% Return on equity = $9,663,000 / $42,570,000 Return on equity = 22.70%
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CHAPTER 3 CASE C-5 2. Regarding the liquidity ratios, East Coast Yachts current ratio is below the median industry ratio. This implies the company has less liquidity than the industry in general. However, the current ratio is above the lower quartile, so there are companies in the industry with lower liquidity than East Coast Yachts. The company may have more predictable cash flows, or more access to short-term borrowing. The turnover ratios are all higher than the industry median; in fact, all three turnover ratios are above the upper quartile. This may mean that East Coast Yachts is more efficient than the industry in using its assets to generate sales. The financial leverage ratios are all below the industry median, but above the lower quartile. East Coast Yachts generally has less debt than comparable companies, but is still within the normal range. 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 well above the industry median. East Coast Yachts seems to be performing well in the profitability area. Overall, East Coast Yachts’ performance seems good, although the liquidity ratios indicate that a closer look may be needed in this area.
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C-6 CASE SOLUTIONS Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio.
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minicase01_solution - CHAPTER 3 RATIOS AND FINANCIAL...

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