Review Chapter 3 Closing Case on pages 81-83. In at least 200 words, fully answer question 3 from that case. Be sure to fully and carefully explain your answer.
RATIOS AND FINANCIAL PLANNING AT EAST COAST YACHTS
After Dan’s analysis of East Coast Yachts’ cash flow (at the end of our previous chapter), Larissa approached Dan about the company’s performance and future growth plans. First, Larissa wants to find out how East Coast Yachts is performing relative to its peers. Additionally, she wants to find out the future financing necessary to fund the company’s growth. In the past, East Coast Yachts experienced difficulty in financing its growth plan, in large part because of poor planning. In fact, the company had to turn down several large jobs because its facilities were unable to handle the additional 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.
EAST COAST YACHTS
2010 Income Statement
Cost of goods sold 435,360,000
Selling, general, and administrative 73,824,000
EBIT $ 88,416,000
Interest expense 11,112,000
EBT $ 77,304,000
Taxes $ 30,921,600
Net income $ 46,382,400
Dividends $ 17,550,960
Retained earnings $ 28,831,440
EAST COAST YACHTS
2010 Balance Sheet
Cash and equivalents $ 11,232,000
Accounts receivable 20,208,000
Total current assets $ 55,280,000
Property, plant, and equipment $462,030,000
Less accumulated depreciation (114,996,000)
Net property, plant, and equipment $347,034,000
Intangible assets and others 6,840,000
Total fixed assets $353,874,000
Total assets $409,154,000
Accounts payable $ 24,546,000
Notes payable 18,725,000
Accrued expenses 6,185,000
Total current liabilities $ 49,456,000
Long-term debt $146,560,000
Total long-term liabilities $146,560,000
Preferred stock $ 3,000,000
Common stock 40,800,000
Capital surplus 31,200,000
Accumulated retained earnings 186,138,000
Less treasury stock (48,000,000)
Total equity $213,138,000
Total liabilities and shareholders’ equity $213,138,000
Yacht Industry Ratios
LOWER QUARTILE MEDIAN UPPER QUARTILE
Current ratio 0.86 1.51 1.97
Quick ratio 0.43 0.75 1.01
Total asset turnover 1.10 1.27 1.46
Inventory turnover 12.18 14.38 16.43
Receivables turnover 10.25 17.65 22.43
Debt ratio 0.32 0.49 0.61
Debt-equity ratio 0.51 0.83 1.03
Equity multiplier 1.51 1.83 2.03
Interest coverage 5.72 8.21 10.83
Profit margin 5.02% 7.48% 9.05%
Return on assets 7.05% 10.67% 14.16%
Return on equity 9.06% 14.32% 22.41%
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?
(BUS 650 95-96)
BUS 650. McGraw-Hill Create. <vbk:9781121130159#page(95)>.
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