A Case Study on

East Coast Yacht

Financial Management
Group II
Ratio East Coast Yachts Yacht industry median

Current ratio 1.57x 1.01x

Quick ratio 1.1x 0.43x

Total asset turnover 1.30x 1.10x

Inventory turnover 18.2x 14.38x

Receivables turnover 33.5x 22.43x

Debt ratio 0.32x 0.32x

Debt-to-equity ratio 0.49x 0.83x

Net profit margin 7.5% 6.2%

Return on assets (ROA) 8.9% 7.8%

Return on equity (ROE) 17.8% 13.9%

•East Coast Yachts: Industry Ratio Analysis

Overall
•East Coast Yachts' industry ratios are generally positive, suggesting that
the company is well-managed and financially sound.
•The company has strong liquidity ratios, asset turnover ratios, and
profitability ratios.
•The company's leverage ratio is also moderate.

Compared to the industry

•East Coast Yachts performs favorably in most areas, with higher current
ratio, quick ratio, total asset turnover, net profit margin, return on
assets, and return on equity than the industry median.
•However, the company's inventory turnover and receivables turnover
are lower than the industry median.

Recommendations
•East Coast Yachts may want to focus on improving its inventory
turnover and receivables turnover in the future.
To calculate the sustainable growth rate (SGR) of East Coast Yachts, we can use the following formula:

SGR = ROE * (1 - Payout Ratio)

Where:

ROE = Return on Equity

Payout Ratio = Dividends / Net Income
Using the information you provided, we can calculate the following:

ROE = Net Income / Equity = 12,562,200 / 55,341,000 = 22.7%

Payout Ratio = Dividends / Net Income = 7,537,320 / 12,562,200 = 60%

Therefore, East Coast Yachts' SGR is:

SGR = 22.7% * (1 - 60%) = 9.1%

This means that East Coast Yachts can expect to grow at a rate of 9.1% per year without having to raise external
financing.

It is important to note that the SGR is just a theoretical calculation. It is possible for a company to grow faster or
slower than its SGR, depending on several factors, such as the availability of financing, the competitive landscape, and
the overall economy.
To calculate the external funds needed, we can use the following formula:

EFN = (Total Assets * Growth Rate) - (Increase in Liabilities - Retained Earnings)

Where:

EFN = External Funds Needed

Total Assets = Total Assets from the previous year's balance sheet
Growth Rate = Sustainable Growth Rate
Increase in Liabilities = Increase in Liabilities from the previous year's balance sheet
Retained Earnings = Retained Earnings from the previous year's balance sheet

Using the information you provided, we can calculate the following:

EFN = (104,308,000 * 9.1%) - (13,660,000 - 5,024,880)

EFN = 9,459,448
Pro forma Income Statement
Year Sales Cost of Other Depreciation EBIT Interest Tax Expense Net Income Dividends Retained
Goods Sold Expenses Expense Earnings

2009 167,310,000 117,910,000 19,994,000 5,460,000 23,946,000 3,009,000 8,374,800 12,562,200 7,537,320 5,024,880

2010 181,924,300 125,980,100 21,173,630 5,955,400 28,795,170 3,250,417 11,518,068 14,026,785 8,416,071 5,610,714

Balance Sheet
Year Assets Liabilities Equity

2009 104,308,000 42,000,000 62,308,000

2010 113,976,268 46,514,968 67,461,300

East Coast Yachts: Feasibility of Achieving 20% Growth Rate with External Equity Capital

•East Coast Yachts is considering raising external equity capital to achieve a growth rate of 20%
the following year without diluting their existing ownership and control positions.
•This can be done by issuing preferred stock, which is a type of equity that does not have voting
rights.

Key Considerations

•Preferred stock typically has a fixed dividend payment, which could reduce the amount of
money available for reinvestment in the company and limit its growth potential.
•Preferred stock also typically has a conversion feature, which means that the investors can
convert their preferred shares into common shares later. If this happens, the investors would
then have voting rights and could potentially dilute the ownership and control positions of the
existing owners.
•Raising external equity capital can be a complex and time-consuming process.

Conclusion and Recommendation

•Whether or not East Coast Yachts should raise external equity capital to achieve a growth rate
of 20% the following year is a complex decision that depends on several factors.
•The company should carefully consider the pros and cons of this option before deciding.
•If the company decides to raise external equity capital, it is important to develop a detailed
business plan and carefully consider the terms of any preferred stock offering.
Assuming east coast yacht is producing at 100% of capacity, as a result, to expand production, the company
must set up an entirely new line at a cost of $30 million. We can calculate the EFN by:

EFN = (104,308,000 * 9.1%) - (13,660,000 - 5,024,880) + 30,000,000

EFN = 39,459,448

•Therefore, the new EFN with the assumption that East Coast Yachts is producing at 100% of capacity and
must set up an entirely new line at a cost of $30 million is $39,459,448.

•This means that East Coast Yachts will need to raise an additional $39,459,448 in external financing to
support its growth rate of 9.1% and to fund the construction of the new production line.