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Case 1 – Ratios and Financial Planning
[Chapter 3, page 81]
In 1969, Tom Warren founded East
Coast Yachts. The company’s operations are located near Hilton Head Island,
South Carolina, and the company is structured as a sole proprietorship. The
company has manufactured custom midsize, high-performance yachts for clients,
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.
Several years ago, Tom retired from
the day-to-day operations of the company and turned the operations of the
company over to his daughter, Larissa.
Because of the dramatic growth at
East Coast Yachts, Larissa decided that the company should be reorganized as
a corporation and, today, the company is publicly traded under the ticker
symbol “ECY.”
Dan Ervin was recently hired by East
Coast Yachts to assist the company with its short-term financial planning and
also 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.
The company’s past growth has been
somewhat hectic, in part due to poor planning. In anticipation of future
growth, Larissa has asked Dan to analyze the company’s cash flows. The
company’s financial statements are prepared by an outside auditor.
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.
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East Coast
Yachts
2023 Income Statement
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Item
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Income
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Sales
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$495,381,600
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Cost of goods sold
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$357,466,500
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Selling, general, and administrative
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$ 59,200,300
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Depreciation
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$ 16,166,700
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EBIT
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$ 62,548,100
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Interest expense
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$ 8,910,000
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EBT
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$ 53,638,100
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Taxes (25%)
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$ 13,409,525
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Net Income
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$ 40,228,575
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Dividends
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$ 17,437,050
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Retained earnings
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$ 22,791,525
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East Coast Yachts
2023 Balance Sheet
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Current Assets
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Amount
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Current Liabilities
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Amount
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Cash and equivalents
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$ 9,096,300
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Accounts payable
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$ 36,146,575
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Accounts receivable
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$ 15,131,900
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Accrued expenses
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$ 5,151,400
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Inventory
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$ 16,322,100
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Total current liabilities
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$ 41,297,975
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Other
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$ 949,400
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Total current assets
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$ 41,499,700
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Fixed assets
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Long-term debt
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$137,200,000
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Property, plant, and equipment
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$370,828,800
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Total long-term liabilities
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$137,200,000
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Less accumulated depreciation
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(92,206,700)
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Net property, plant, and equipment
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$278,622,100
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Intangible assets and others
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$ 6,094,800
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Stockholders’ equity
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Total fixed assets
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$284,716,900
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Preferred stock
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$ 1,595,700
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Common stock
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$ 29,057,000
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Capital surplus
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$ 24,178,000
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Accumulated retained earnings
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$131,382,725
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Less treasury stock
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(38,494,800)
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Total equity
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$ 147,718,625
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Total assets
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$326,216,600
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Total liabilities and shareholders’ equity
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$326,216,600
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Yacht Industry Ratios
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Ratio
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Lower Quartile
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Median
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Upper Quartile
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Current ratio
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.86
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1.51
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1.97
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Quick ratio
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.43
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.75
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1.01
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Total asset turnover
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1.10
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1.27
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1.46
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Inventory turnover
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12.18
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14.38
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16.43
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Receivables turnover
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10.25
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17.65
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22.43
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Debt ratio
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.32
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.56
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.61
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Debt-equity ratio
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.83
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1.13
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1.44
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Equity multiplier
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1.83
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2.13
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2.44
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Interest coverage
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5.72
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8.21
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10.83
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Profit margin
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5.02%
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7.48%
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9.05%
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Return on assets
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7.05%
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10.67%
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14.16%
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Return on equity
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14.06%
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19.32%
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26.41%
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Assignment
Directions
Write a case analysis of 2,000 –
2,500 words (8 to 10 pages), content (title page and reference page not
included) in proper APA format, covering the following requirements:
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