Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and evaluate the companys 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 companys 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 companys 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 several 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, ensure that attention to detail is a necessity. For instance, East Coast Yachts will spend 80 to 100 hours hand-buffing the stainless-steel stem-iron, the metal cap on the yachts 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

2015 Income Statement

Sales	$210,900,000
Cost of goods sold	148,600,000
Other expenses	25,192,000
Depreciation	6,879,000
Earnings before interest and taxes (EBIT)	$ 30,229,000
Interest	3,791,000
Taxable income	$ 26,438,000
Taxes (40%)	10,575,200
Net income	$ 15,862,800
Dividends	$ 4,759,301
Additions to RE	$11,103,499

EAST COAST YACHTS

Balance Sheet as of December 31, 2015

Assets		Liabilities & Equity
Current assets:		Current liabilities:
Cash	$ 3,285,600	Accounts payable	$ 6,977,700
Accounts receivable	5,910,800	Notes payable	14,342,600
Inventory	6,627,300	Total	$ 21,320,300
Total	$ 15,823,700	Long-term debt	$ 36,400,000
		Shareholders equity:
		Common stock	$ 5,580,000
Fixed assets:		Retained earnings	54,004,600
Net plant and equipment	$ 101,481,200	Total equity	$ 59,584,600
Total assets	$ 117,304,900	Total liabilities and equity	$ 117,304,900

Yacht Industry Ratios

	Lower Quartile	Median	Upper Quartile
Current ratio	.50	1.43	1.89
Quick ratio	.21	.38	.62
Total asset turnover	.68	.85	1.38
Inventory turnover	6.85	9.15	16.13
Receivables turnover	6.27	11.81	21.45
Debt ratio	.44	.52	.61
Debtequity ratio	.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%

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

Q 2. Calculate the sustainable growth rate of East Coast Yachts. Calculate external funds needed (EFN) and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe?

Q 3. 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 company must set up an entirely new line at $25 million. Calculate the new EFN with this assumption. What does this imply about capacity utilization for East Coast Yachts next year?