Japneet Singh - Question 5 Paraphrase

b) The significant EFN implies a substantial investment in fixed assets, especially in the cost of setting up the new production line. This is consistent with the uneven or accurate increase in fixed assets.  c) The need to establish a brand-new line at a specific cost underscores the difficulty of expanding without investing more. This means that the company must spend a lot of capital to expand its manufacturing capacity.  d) Since East Coast Yachts is already operating at maximum capacity, it appears that the existing facilities are not able to support the anticipated expansion with the resources now available, as seen by the necessity to establish a completely new line    Imply about capacity utilization for East Coast Yachts next year -   The need for a new production line at East Coast Yachts, due to the current one being fully busy, indicates that the company anticipates an increase in demand for its products in the coming year. This shows the company's belief in continuous expansion and its desire to take advantage of opportunities in the market. Yet, the requirement for additional fixed assets and external financial support indicates that the current amenities are unable to accommodate the projected demand, necessitating significant investments to increase capacity. Essentially, East Coast Yachts' emphasis on increasing production capacity reflects its optimistic view of future expansion, highlighting the crucial role of thorough planning and financial management in supporting and maintaining this growth.      Pro Forma Income Statement:   Items   Year 2022   Pro Forma   Sales  $185,250,000  $216,020,025  Cost of Goods Sold  $136,125,000  $158,735,363  Other Expenses  $22,169,000  $25,851,271  Depreciation  $6,054,000  $6,054,000  EBIT  $20,902,000  $25,379,392  Interest  $3,336,000  $3,336,000  Taxable Income  $17,566,000  $22,043,392  Taxes (21%)  $3,688,860  $4,629,112  Net Income  $13,877,140  $17,414,279  Dividends  $6,340,000  $7,958,326  Additions to $7,537,140  $9,455,954 

Retained Earnings     Pro Forma Balance Sheet:   Items   Year 2022   Pro Forma              Cash  $2,891,400  $3,371,662  Accounts Receivable  $5,201,500  $6,065,469  Inventory  $5,832,100  $6,800,812  Total Current Assets  $13,925,000  $16,237,943  Net PP&E (Fixed Assets) $89,303,400  $104,136,695  Total Assets  $103,228,400  $120,374,637  Accounts Payable  $5,582,200  $6,509,403  Notes Payable  $12,621,500  $14,717,931  Total Current Liabilities$18,203,700  $21,227,335  Long-term Debt  $32,100,000  $32,100,000  Total Liabilities  $50,303,700  $53,327,335  Common Stock  $4,912,000  $4,912,000  Retained Earnings  $48,012,700  $57,468,654  Total Equity  $52,924,700  $62,380,654  Total Liabilities & Equity  $103,228,400  $120,374,637    To calculate the depreciation, new fixed assets, and pro forma depreciation, we'll need to gather the necessary information:   Depreciation for Year 2022: $6,054,000 (Given)  Net PP&E (Fixed Assets) for Year 2022: $89,303,400 (Given)  Net PP&E (Fixed Assets) for Pro Forma: $104,136,695 (Given)  Now, let's calculate:   1. Depreciation Rate:   Depreciation Rate = Depreciation / Net PP&E  For Year 2022:  Depreciation Rate = $6,054,000 / $89,303,400 ≈ 0.0678 or 6.78%  2. New Fixed Assets for Pro Forma:   New Fixed Assets = Net PP&E Pro Forma - Net PP&E Year 2022  New Fixed Assets = $104,136,695 - $89,303,400 = $14,833,295  3. Pro Forma Depreciation:   Pro Forma Depreciation = New Fixed Assets × Depreciation Rate  Pro Forma Depreciation = $14,833,295 × 0.0678 = $1,005,237.45  Therefore, the Pro Forma Depreciation is approximately $1,005,237.45. 

Retained Earnings: Increased from $48.01 million to $57.47 million, showing the profits earned during the period after subtracting dividends paid to shareholders and additions to retained earnings.  Total Equity: Went up from approximately $52.92 million to about $62.38 million, mainly because retained earnings grew during the period.      Overall, the increase in equity signifies the accumulation of profits and positive performance of the company during the pro forma period.    To summarize, the EFN calculation reveals the amount of funds required for East Coast Yachts to grow its capabilities and create a new manufacturing line. The need for a specific investment in fixed assets showcases the features of a fixed cost structure and indicates the business must manage its finances properly to support the planned growth.