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Unformatted text preview: nal demand. Larissa hoped that Dan would be able to estimate the amount of capital the company would have to raise next year so that East Coast Yachts would be better prepared to fund its expansion plans. To get Dan started with his analyses, Larissa provided the following financial statements. Dan then gathered the industry ratios for the yacht manufacturing industry. CLOSING CASE CHAPTER 3 Financial Statements Analysis and Long-Term Planning 87 ros82361_ch03.indd 87 5/27/08 8:25:10 PM Confirming Pages EAST COAST YACHTS 2008 Income Statement Sales Cost of goods sold Selling, general, and administrative Depreciation EBIT Interest expense EBT Taxes Net income Dividends Retained earnings $514,800,000 362,800,000 61,520,000 16,800,000 $ 73,680,000 9,260,000 $64,420,000 25,768,000 $ 38,652,000 $ 15,460,800 23,191,200 EAST COAST YACHTS 2008 Balance Sheet Current assets Cash and equivalents Accounts receivable Inventories Other Total current assets Current liabilities Accounts payable Notes payable Accrued expenses Total current liabilities Long-term debt Stockholders’ equity Preferred stock Common stock Capital surplus Accumulated retained earnings Less treasury stock Total equity Total liabilities and shareholders’ equity $ 9,360,000 16,840,000 18,880,000 1,570,000 $ 46,650,000 $ 19,880,000 13,250,000 3,160,000 $ 36,290,000 $103,800,000 $ 2,500,000 34,000,000 26,000,000 154,280,000 (15,400,000) $201,380,000 $341,470,000 Fixed assets $294,820,000 Total assets $341,470,000 Yacht Industry Ratios LOWER QUARTILE 0.86 0.43 1.10 12.18 10.25 0.32 0.51 1.51 5.72 5.02% 7.05% 9.06% MEDIAN 1.51 0.75 1.27 14.38 17.65 0.47 0.83 1.83 8.21 7.48% 10.67% 14.32% UPPER QUARTILE 1.97 1.01 1.46 16.43 22.43 0.61 1.03 2.03 10.83 9.05% 14.16% 20.83% Current ratio Quick ratio Total asset turnover Inventory turnover Receivables turnover Debt ratio Debt-equity ratio Equity multiplier Interest coverage Profit margin Return on assets Return on equity 88 PART 1 Overview ros82361_ch03.indd 88 7/7/08 3:59:10 PM Confirming Pages
1. East Coast Yachts uses a small percentage of preferred stock as a source of financing. In calculating the ratios for the company, should preferred stock be included as part of the company’s total equity? 2. Calculate all of the ratios listed in the industry table for East Coast Yachts. 3. 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 would you interpret this ratio? How does East Coast Yachts compare to the industry average for this ratio? 4. Calculate the sustainable growth rate for 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? 5. As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the shareholders 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? 6. 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 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 $75,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for East Coast Yachts next year? CHAPTER 3 Financial Statements Analysis and Long-Term Planning 89 ros82361_ch03.indd 89 5/27/08 8:25:19 PM...
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