East Coast Yachts uses a small percentage of preferred stock
Respond to each of the following questions and prompts.
Calculate all required ratios.
Justify your responses with reasoning and evidence.
1. East Coast Yachts uses a small percentage of preferred stock as a source of financing. In calculating the ratios for the company, should preferred stock be included as part of the company’s total equity?
Yes, when calculating ratios for the company – the company should include the preferred stock as the company’s total equity. As a general rule, preferred stock IS a major part of the Company’s total equity (stakeholder equity). Basically, preferred stock is an equity that is slightly different from an equity share, as they have different preferential rights over the equity shares.
2. Calculate all of the ratios listed in the industry table for East Coast Yachts.
|
Ratios |
Calculated Ratios (Enter your ratios below) |
|
Current ratio |
$46,475,460 / $46,233,400 = 1.01 Times |
|
Quick ratio |
$18,317,860 - $28,157,600 / $46233400 = 0.61 Times |
|
Total asset turnover |
$555,984,000/$364,962,160 = 1.52 Times |
|
Inventory turnover |
$391,824,000 / $18,317,860 = 21.39 Times |
|
Receivables turnover |
$555,984,000 / $16,983,200 = 32.74 Times |
|
Debt ratio |
$46,266,400 + $131,904,000 / $364,962,160 = 0.49 Times |
|
Debt-equity ratio |
$46,266,400 + $131,904,000 / $186,824,760 = 0.95 Times |
|
Equity multiplier |
$364,962,160 / $186,824,760 = 1.95 Times |
|
Interest coverage |
$79,574,400 / $10,000,800 = 7.96 Times |
|
Profit margin |
$41,744,160 / $555,984,000 = 0.08 Times |
|
Return on assets |
$41,744,160 / $364,962,160 = 0.11 Times |
|
Return on equity |
$41,744,160 / $186,824,760 = 0.22 Times |
3a. 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.
|
Ratios |
Calculated Ratios (Enter your ratios below) |
Positive or Negative Relative to the Industry (Explain your reasoning) |
|
Current ratio |
1.01 |
Negative – between lower and median. |
|
Quick ratio |
0.61 |
Negative – might be having liquidity problems |
|
Total asset turnover |
1.52 |
Positive – in the upper quartile, seem to be utilizing assets |
|
Inventory turnover |
21.39 |
Positive – would appear there is good inventory management |
|
Receivables turnover |
32.74 |
Positive – would appear to have good collecting on receivables – well above the upper quartile |
|
Debt ratio |
0.49 |
Positive – Seems they are inline with the current industry |
|
Debt-equity ratio |
0.95 |
Positive – right between median and upper. This is good for credit and likely to increase the shareholder returns |
|
Equity multiplier |
1.95 |
Positive - right between median and upper. This is good for credit and likely to increase the shareholder returns |
|
Interest coverage |
7.96 |
Positive – though it is slightly below the median, it is still above the lower quartile, however there would still be a concern of increasing dent to monitor. |
|
Profit margin |
0.08 (8%) |
Positive – Seem to be good at controlling costs and are likely to be performing well alongside their peers |
|
Return on assets |
0.11 |
Positive – Company is above the median and is performing well as compared to its peers |
|
Return on equity |
0.22 |
Positive – Achieving at the upper quartile, again – they are performing above the majority of their peers. |
3b. 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?
The ratio would look something like this: (Inventory) $18,317,860 / (Current Liabilities) $46,233,400 = 0.40 Times
This concept seems to imply that the amount of current liabilities can be paid for from the sale of inventory. That said, if we were to utilize this method, East Coast Yachts would be performing well below the industries lower quartile.
4a. Calculate the sustainable growth rate for East Coast Yachts.
<Enter your sustainable growth rate here.>
Note. You will use your sustainable growth rate to complete the pro forma income statements and balance sheets below.
4b. Calculate external funds needed (EFN) and prepare pro forma income statements and balance sheets assuming growth at precisely this rate.
|
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 |
(cont.)
|
East Coast Yachts 2010 Balance Sheet |
|||
|
Current assets |
Current liabilities |
||
|
Cash and equivalents |
$11,232,000 |
Account payable |
$24,546,000 |
|
Accounts receivable |
20,208,000 |
Notes payable |
18,725,000 |
|
Inventories |
22,656,000 |
Accrued expenses |
6,185,000 |
|
Other |
1,184,000 |
Total current liabilities |
$49,456,000 |
|
Total current assets |
$55,280,000 |
||
|
Fixed assets |
Long-term debt |
$146,560,000 |
|
|
Property, plant, and equipment |
$462,030,000 |
Total long-term liabilities |
$146,560,000 |
|
Less accumulated depreciation |
(114,996,000) |
||
|
Net property, plant, and equipment |
$347,034,000 |
||
|
Intangible assets and others |
6,840,000 |
Stockholders’ equity |
|
|
Total fixes assets |
$353,874,000 |
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 assets |
$409,154,000 |
Total liabilities and shareholders’ equity |
$409,154,000 |
<Calculate external funds>
<Create pro forma documents>
4c. Re-calculate the ratios in the previous question. What do you observe?
|
Ratios |
Re-calculated Ratios (Enter your recalculated ratios below) |
|
Current ratio |
<Enter ratio here> |
|
Quick ratio |
<Enter ratio here> |
|
Total asset turnover |
<Enter ratio here> |
|
Inventory turnover |
<Enter ratio here> |
|
Receivables turnover |
<Enter ratio here> |
|
Debt ratio |
<Enter ratio here> |
|
Debt-equity ratio |
<Enter ratio here> |
|
Equity multiplier |
<Enter ratio here> |
|
Interest coverage |
<Enter ratio here> |
|
Profit margin |
<Enter ratio here> |
|
Return on assets |
<Enter ratio here> |
|
Return on equity |
<Enter ratio here> |
<Compose your observations here>
5. As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the shareholders 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?
<Compose response here>
6. 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 since 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 and sales are expected to grow at 20 percent. As a result, to expand production, the company must set up an entirely new line at a cost of $95,000,000. Prepare the pro forma income statement and balance sheet. What is the new EFN with these assumptions? What does this imply about capacity utilization for East Coast Yachts next year?
[Pro forma and balance sheet]
<Insert New EFN>
<Compose response here>
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Rating:
/5
Solution: East Coast Yachts uses a small percentage of preferred stock