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Question No. 1: Calculate all of the ratios listed in the industry table for East Coast Yachts. Ratio Formula Calculation AnswerCurrent Ratio Current Assets Current Liabilities14.651.00019.539.000 0.74 TimesQuick Ratio Current Assets-InventoryCurrent Liabilities14.651.000-6.316.00019.539.000 0.43 TimesTotal Asset Turnover RatioSalesTotal Assets167.310.000108.615.000 1.54 TimesInventory Turnover RatioCOGSInventory117.910.0006.136.000 19.2 TimesReceivable Turnover RatioSalesAccounts Receivable167.310.0005.437.000 30.57 TimesDebt RatioTotal Assets-Total EquityTotal Assets108.615.000-55.342.000108.615.000 0.49 TimesDebt-Equity RatioTotal DebtTotal Equity53.274.00055.341.000 0.96 TimesEquity MultiplierTotal AssetsTotal Equity108.615.00055.341.000 1.96 TimesInterest CoverageEBITInterest23.946.0003.009.000 7.96 TimesProfit MarginNet IncomeSales12.562.200167.310.000 7.5%Return on AssetsNet Income Total Assets12.562.200108.615.000 11.5%Return on EquityNet IncomeTotal Equity12.562.20055.341.000 22.6%Question No. 2: 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 do you interpret this ratio? How does East Coast Yachts compare to the industry average?Interpretation:Current Ratio of East Coast is high as compared to Lower Quartile means better ability to pay current liabilities but very low as compared Median and Upper Quartile which means low solvency position. Quick Ratio is high than Lower Quartile but low than Median and Upper Quartile showing that less solvent if inventory is deducted from Current Assets.Interpretation:Total Asset Turnover Ratio is high as compared to all industry ratios which mean that East Coast is utilizing its assets very well to generate revenues.Inventory Turnover Ratio is high as compared to all industry ratios which mean that East Coast is converting its inventory into cash maximum times a year. Receivable Turnover Ratio is also high as compared to all industry ratios which mean that East Coast is receiving cash from receivables maximum times a year.Interpretation:According to Debt Ratio, East Coasts is less able to pay its liabilities than Upper and Median Quartile but more than Lower Quartile.Debt to Equity Ratio is less than Upper and Median Quartile means portion of equity is more than debt showing good solvency position of East Coasts. And Vice Versa comparison to Lower Quartile.Equity Multiplier shows that East Coasts equity is 1.96 times of the assets which is low as compared to Upper and Median Quartile but more than Lower Quartile. Interpretation:According to the Ratio, East Coast can pay interest payments 7.96 times which is low / not favorable than Upper and Median Quartile but high than Lower Quartile. Interpretation:Profit Margin of East Cost is high than Lower Quartile and Median showing high return on sale but low as compared to Upper Quartile.Return on Assets of East Cost is high than Lower Quartile and Median mean high revenues in sale of assets but low as compared to Upper Quartile.Return on Equity of East Cost is high than Lower Quartile and Median but low as compared to Upper Quartile.Overall Comparison To Industry Ratio Positive /Negative ReasonLiquidity Ratios Positive Short Term Solvency Position of East Coast is good as compared to Industry.Turnover RatiosPositive Turnover Ratios are all positive as compared to Industry Coverage RatiosNegative Interest Paying Ability is not very good Overall.Long Term Solvency RatiosNegativeLong Term paying ability is not too good as compared to Industry.Profitability RatiosPositive Al are positive as compared to Industry.Question No. 3: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?Sustainable Growth rate:ROE*( 1-DIVIDEND PAYOUT RATIO) ROE = Net Income÷Equity ROE = 12562200 / 55341000 = 22%Dividend Payout = Total Dividend / Net Income = 75, 37,320/ 125, 62,200 = 0.6 Sustainable Growth Rate = 22% * (1 - 0.6) = 9.08% INCOME STATEMENT FOR THE YEAR ENDED 2009 Particulars Amount By Growth Rate of 9.08%Sales18,25,01,748Cost of Goods Sold(12,86,16,228)Other Expenses(2,18,09,455.2)Depreciation (No Change) (5,460,000)EBIT26616064.8Interest (No Change)(3,009,000)Taxable Income2360,70,64.8Taxes (40%)(94,42,826)Net Income14,16,42,39Dividends88,21,708.6Addition to RE53,42,530 BALANCE SHEET AS ON 2009 Assets AmountLiabilities & Equity AmountCurrent AssetCurrent LiabilityCash33,18,213.6Account Payable70,47,658.8Account Receivables59,69,948.4Notes Payable1,42,65,482.4Inventory66,93,148.8Total Current Liability2,13,13,141.2Total Current Asset1,29,81,301.8Fixed AssetsLong Term Debt (No Change)3,37,35,000Net Plant & Equipment10,24,95,931.2?SHAREHOLDER'S EQUITYCommon Stock56,72 160Retained Earnings5,56,93,802.8Total Equity6.03.65,962.8Total Assets11,84,77,242Total Liabilities & Equity11,54,14,104Calculation of External Fund Needed:External Funds needed will be the value that a firm needs to take loan. Here Long Term Debt is constant so External Fund Needed will be calculated as follows: External Fund Needed = Total Assets – Total Liabilities & Equity = 11,84,77,242 - 11,54,14,104 = 30, 63,186RATIO ANALYSIS WITH SUSTAINABLE GROWTH RATE OF 9.08% Ratio Formula Calculation AnswerCurrent Ratio Current Assets Current Liabilities1,29,81,301.82,13,13,141.2 0.60 TimesQuick Ratio Current Assets-InventoryCurrent Liabilities1,29,81,301.8-66,93,148.82,13,13,141.2 0.29 TimesTotal Asset Turnover RatioSalesTotal Assets18,25,01,74811,84,77,242 1.54 TimesInventory Turnover RatioCOGSInventory12,86,16,22866,93,148.8 19.2 TimesReceivable Turnover RatioSalesAccounts Receivable18,25,01,74859,69,948.4 30.57 TimesDebt RatioTotal Assets-Total EquityTotal Assets11,84,77,242-6.03.65,962.811,84,77,242 0.49 TimesDebt-Equity RatioTotal DebtTotal Equity2,13,13,141.2+ 3,37,35,000 6.03.65,962.8 0.91 TimesEquity MultiplierTotal AssetsTotal Equity11,84,77,2426.03.65,962.8 1.96 TimesInterest CoverageEBITInterest26616064.83,009,000 7.96 TimesProfit MarginNet IncomeSales14,16,42,3918,25,01,748 7.76%Return on AssetsNet Income Total Assets14,16,42,3911,84,77,242 11.9%Return on EquityNet IncomeTotal Equity14,16,42,396.03.65,962.8 23.46 %Comparison of Ratios with and without Sustainable Growth Rate Ratio Without Sustainable Growth Rate With Sustainable Growth Rate (9.08%) EffectCurrent Ratio 0.74 Times 0.60 TimesA Little Bit ChangeQuick Ratio 0.43 Times 0.29 TimesA Large Change Total Asset Turnover Ratio 1.54 Times 1.54 TimesNo EffectInventory Turnover Ratio 19.2 Times 19.2 TimesNo EffectReceivable Turnover Ratio 30.57 Times 30.57 TimesNo EffectDebt Ratio 0.49 Times 0.49 TimesNo EffectDebt-Equity Ratio 0.96 Times 0.91 TimesA Little Bit ChangeEquity Multiplier 1.96 Times 1.96 TimesNo EffectInterest Coverage 7.96 Times 7.96 TimesNo EffectProfit Margin 2.5% 7.76%A Large ChangeReturn on Assets 11.5% 11.9%No EffectReturn on Equity 22.6% 23.46 %A Little Bit Change Analysis:Sustainable Growth Rate which is used to check to Firm’s ability of growing without taking Loan. After calculating Sustainable Growth Rate, Long Term Debt, Interest and Dividends are kept Constant to check it. According to the above analysis, it is shown that Sustainable Growth Rate have no effect on Turnover, Coverage, Equity Multiplier Ratios and Long Term Solvency Position but have an effect on Profits and Equity Returns.Question No. 4:As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners don’t want to dilute their existing ownership and control positions. However, East Coast Yachts is planning for a growth rate of 20 percent next year. What are your conclusions and recommendations about the feasibility of East Coast’s expansion plans?Here, the given Sustainable Growth Rate is 20%.Now according to that rate we will form a new Balance Sheet and Income Statement. INCOME STATEMENT FOR THE YEAR ENDED 2009 Particulars Amount (Growth Rate 20%)Sales20,07,72,000Cost of Goods Sold14,14.92,000Other Expenses2,39,92,800Depreciation (No Change) 54,60,000EBIT2,98,27,200Interest (No Change)30,09,000Taxable Income2,68,18,200Taxes (40%)1,07,27,280Net Income1,60,90,920Dividends96,54,552Addition to RE64.36,368 BALANCE SHEET AS ON 2009 Assets AmountLiabilities & Equity AmountCurrent AssetCurrent LiabilityCash36,50,400Account Payable77,53,200Account Receivables65,67,600Notes Payable1,56,3,600Inventory73,63,200Total Current Liability2,34,46,800Total Current Asset1,75,81,200Fixed AssetsLong Term Debt (No Change)3,37,35,000Net Plant & Equipment11,27,56,800?SHAREHOLDER'S EQUITYCommon Stock52,00,000Retained Earnings5,65,77,368Total Equity6,17,77,368Total Assets13,03,38,000Total Liabilities & Equity11,89,59,168Calculation of External Fund Needed:External Funds needed will be the value that a firm needs to take loan. Here Long Term Debt is constant so External Fund Needed will be calculated as follows: External Fund Needed = Total Assets – Total Liabilities & Equity = 13,03,38,000 - 11,89,59,168 = 1,13,78,832Conclusion:If the East Coast Firm have a growth rate of 20% then its profit will be $ 2,68,18,200 without taking loan and extra fund they will need is of $ 1,13,78,832Question No. 5Most 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 a cost of $30 million.Purchase of Fixed Asset will cause changes in Depreciation in Income Statement and in Total Fixed Assets in Balance Sheet.Effect on Fixed Asset:New Asset Purchased = 3 millionNew Total Fixed Assets = 93,964,000 + 30,000,000 = 12,39,64,000 Effect on DepreciationNew Depreciation will be calculated on the basis of old depreciation percentage.Old Depreciation Percentage = 5,460,000 ÷ 93,964,000 = 5.8% New depreciation= 12,39,64,000 * 5.8% = 7,203,221 INCOME STATEMENT FOR THE YEAR ENDED 2009 Particulars Amount (Growth Rate 20%)Sales20,07,72,000Cost of Goods Sold(14,14.92,000)Other Expenses(2,39,92,800)Depreciation (72,03,221)EBIT2,80,83,979Interest (No Change)(30,09,000)Taxable Income2,50,74,979Taxes (40%)(1,00,29,992)Net Income1,50,44,988Dividends(96,54,552)Addition to RE60,17,995 BALANCE SHEET AS ON 2009 Assets AmountLiabilities & Equity AmountCurrent AssetCurrent LiabilityCash36,50,400Account Payable77,53,200Account Receivables65,67,600Notes Payable1,56,3,600Inventory73,63,200Total Current Liability2,34,46,800Total Current Asset1,75,81,200Fixed AssetsLong Term Debt (No Change)3,37,35,000Net Plant & Equipment12,39,64,000?SHAREHOLDER'S EQUITYCommon Stock52,00,000Retained Earnings5,65,77,368Total Equity6,17,77,368Total Assets14,15,45,200Total Liabilities & Equity11,89,59,168 Calculation of External Fund Needed:External Funds needed will be the value that a firm needs to take loan. Here Long Term Debt is constant so External Fund Needed will be calculated as follows: External Fund Needed = Total Assets – Total Liabilities & Equity = 14,15,45,200 - 11,89,59,168 = 2,25,86,032Conclusion:East Coast Yachts in increasing its fixed assets due to which there is cash out flow but the growth rate for all is same 5.8% which means no cash inflow. It will have to focus on generating more cash revenues to survive because debt loan is already constant. ................
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