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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
Sales                                                                                        $617,760,000
Cost of goods sold                                                                  435,360,000
Selling, general, and administrative                                        73,824,000
Depreciation                                                                            20,160,000
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
Current assets
Cash and equivalents                                                          $ 11,232,000
Accounts receivable                                                           20,208,000
Inventories                                                                          22,656,000
Other                                                                                  1,184,000
Total current assets                                                                  $ 55,280,000
Fixed assets
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
Current liabilities
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
Stockholders’ equity
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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