Calculate the sustainable growth rate of east coast yachts

Assignment Help Corporate Finance

Reference no: EM131289575

Assignment

-Corporate Finance, 10th edition, by Ross, Westerfield and Jaffe-

Dan Ervin was recently hired by East Coast Yachts to assist the company with its short- term financial planning and to evaluate the company's financial performance. Dan graduated from college five years ago with a finance degree, and he has been employed in the treasury department of a Fortune 500 company since then.

East Coast Yachts was founded 10 years ago by Larissa Warren. The company's operations are located near Hilton Head Island, South Carolina, and the company is structured as an LLC. The company has manufactured custom midsize, high-performance yachts for clients over this period, and its products have received high reviews for safety and reliability. The company's yachts have also recently received the highest award for customer satisfaction. The yachts are primarily purchased by wealthy individuals for pleasure use. Occasionally, a yacht is manufactured for purchase by a company for business purposes.

The custom yacht industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity. For instance, East Coast Yachts will spend 80 to 100 hours on hand-buffing the stainless steel stem-iron, which is the metal cap on the yacht's bow that conceivably could collide with a dock or another boat.

To get Dan started with his analyses, Larissa has provided the following financial statements. Dan has gathered the industry ratios for the yacht manufacturing industry.

EAST COAST YACHTS 2012 Income Statement
Sales		$234,300,000
Cost of goods sold		165,074,000
Other expenses		27,991,000
Depreciation		7,644,000
Earnings before interest and taxes (EMT)		$ 33,591,000
Interest		4,212,600
Taxable income		$ 29,378,400
Taxes (40%)		11,751,360
Net income		$ 17,627,040
Dividends		$ 5,288,112
Add to RE		$12,338,928

EAST COAST YACHTS Balance Sheet as of December 31, 2012
Assets		Liabilities & Equity
Current assets		Current liabilities
Cash	$ 3,650,700	Accounts payable	$ 7,753,000
Accounts receivable	6,567,600	Notes payable	15,936,300
Inventory	7,363,700
Total	$ 17,582,000	Total	$ 23,689,300
Fixed assets		Long-term debt	$ 40,480,000
Net plant and equipment	$112,756,900
		Shareholders' equity
		Common stock	$ 6,200,000
		Retained earnings	59,969,600
		Total equity	$ 66,169,600
Total assets	$130,338,900	Total liabilities and equity	$130,338,900

Yacht Industry Ratios
	Lower Quartile	Median	r Quartile
Current ratio	0.50	1.43	1.89
Quick ratio	0.21	0.38	0.62
Total asset turnover	0.68	0.85	1.38
Inventory turnover	6.85	9.15	16.13
Receivables turnover	6.27	11.81	21.45
Debt ratio	0.44	0.52	0.61
Debt-equity ratio	0.79	1.08	1.56
Equity multiplier	1.79	2.08	2.56
Interest coverage	5.18	8.06	9.83
Profit margin	4.05%	6.98%	9.87%
Return on assets	6.05%	10.53%	15.83%
Return on equity	9.93%	16.54%	28.14%

Answer the following questions

1. Calculate all of the ratios listed in the industry table for East Coast Yachts.

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?

3. Calculate the sustainable growth rate of East Coast Yachts. Calculate external funds needed and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question.

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 Yachts expansion plans? (Only 1 recommendations are needed.)

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 must set up an entirely new line at a cost of $30 million. Calculate the new EFN with this assumption. What does this imply about capacity utilization for East Coast Yachts next year?

Reference no: EM131289575

Questions Cloud

Discuss the different types of trade sales promotions : Discuss the different types of trade sales promotions and distinguish these types of promotions from business promotions.

How much power does the pump add to the fluid : If the inlet and exit temperature are equal, how much power does the pump add to the fluid?

Example of a positive motivation policy-action : At one small company, each month an employee is given a parking spot next to the president's space near the front door to recognize the employee's contribution. Although this is just one example of a positive motivation policy/action, there are ma..

Record the declaration and payment of the cash dividend : Greenwood corporation has 80,000 shares of common stock outstanding . it declares at $1 per share cash dividend on november 1 to stockholders of record on december 1. the dividend is paid on december 31 . prepare the entries on appropriate dates to r..

Calculate the sustainable growth rate of east coast yachts : Calculate the sustainable growth rate of East Coast Yachts. Calculate external funds needed and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question.

Discuss the questions related to java programming : Discuss the Questions related to JAVA programming:Create a class called Employee that includes three instance variables-a first name (type String), a last name (type String) and a monthly salary (double). Provide a constructor that initializes the ..

How are sales dealt with in your country : What procedure do businesses in your country usually follow for selecting the right candidate for sales roles? Candidate selection techniques can vary; is there a common approach?

Develop an expression for the fluid velocity : Develop an expression for the fluid velocity, v(r), where r is the distance from the center of the shaft.

Trends current problems air trans : What do you think is the most important challenge to the industry? Is it a new challenge or one that has plagued the industry for decades? Support your response.

User Account

All Pages