Company Overview

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California International Business University *

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Finance

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Feb 20, 2024

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Company Overview Vision East Coast Yachts (ECY), established a decade ago by Larissa Warren, is a South Carolina-based limited liability company located near Hilton Head Island. Over the years, ECY has built medium-sized, high-performance custom yachts for clients that are known for their reliability and safety. Mission ECY aims to deliver the best possible customer experience, under buying, selling, building, chartering, or looking for a luxury yacht manager. To satisfy its customers, who view yachting as a reflection of success but most importantly, the joy of sailing freely and without restrictions, ECY offer a range of products and services. Products and Services Market Share – ECY less than 5% Products Services Yachts Axopar, J Boats, Targa, Sirena Yachts Buy and Sell Services Strategic Initiatives With a reliable partnership built on clear-cut, impartial, and reasonably priced professional advice, ECY, a company of great value, provides a valued partner to counsel its clients and aid in all areas . The greatest award for customer satisfaction was recently given to ECY's yachts. Yachts are primarily purchased by wealthy individuals, mostly for leisure use. Every now and then a boat is built especially for a company to purchase for commercial purposes. Question 01 – Calculation of Ratios Ratio Calculation ‘000 ECY Position Year 2022 Current Ratio Current Assets/ Current Liabilities 0.76

13.925/18.203 Quick Ratio (Cash + Accounts Receivable) / Current Liabilities ($2,891,400 + $5,201,500) / $18,203,700 0.44 Total asset turnover (TAT) Sales / Total Assets $185,250,000 / $103,228,400 1.79 Inventory turnover Cost of Goods Sold / Average Inventory $136,125,000 / $5,832,100 23.34 Receivables turnover Sales / Accounts Receivable$185,250,000 / $5,201,500 35.61 Debt ratio Total Liabilities / Total Assets $50,203,700 / $103,228,400 0.49 Debt-equity ratio Total Debt / Shareholders' Equity ($18,203,700 + $32,100,000) / $52,924,700 0.95 Equity multiplier Total Assets / Shareholders' Equity $103,228,400 / $52,924,700 1.95 Interest coverage : EBIT / Interest $20,902,000 / $3,336,000 6.27 Profit margin % Net Income / Sales $13,877,140 / $185,250,000 7.49% Return on Assets (ROA) % Net Income / Total Assets -$13,877,140 / $103,228,400 13.44% Return on equity (ROE) % Net Income / Shareholders' Equity $13,877,140 / $52,924,700 26.22%

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Question 02 – Analysis of ECY ratios with Industry Ratios Industry Ratio Analysis \ ECY Company Financial Ratio Analysis Compared to Industry Benchmarks: 1. Current Ratio: 0.76  Position: Above the lower quartile but below the industry median.  Implication: Weaker ability to meet short-term liabilities compared to the industry median. 2. Quick Ratio: 0.44  Position: Below the industry median and upper quartile, but above the lower quartile.  Implication: Most liquid assets are less than the industry median for covering short-term obligations. 3. Total Asset Turnover (TAT): 1.79

 Position: Exceeds both the top quartile and industry median.  Implication: Efficiently generates income from assets compared to the industry median and top quartile. 4. Inventory Turnover: 23.34  Position: Significantly greater than the upper quartile and industry median.  Implication: Swift inventory turnover suggests effective control, rapid sales cycles, and strong customer demand. 5. Receivables Turnover: 35.61  Position: Much higher than the upper quartile and industry median.  Implication: Collects receivables at a significantly faster rate compared to other industry companies. 6. Debt Ratio: 0.49  Position: Below the highest quartile but between the lower and median quartiles.  Implication: Moderate debt load compared to the industry, with less leverage than the top 25%. 7. Debt-Equity Ratio: 0.95  Position: Below the upper quartile but between the lower and median quartiles.  Implication: Reasonable debt-to-equity ratio compared to the industry. 8. Equity Multiplier: 1.95  Position: Below the upper quartile but between the lower and median quartiles.  Implication: Moderate financial leverage compared to the industry, with less leverage than the top 25%. 9. Interest Coverage: 6.27  Implication: Limited ability to cover interest expenses compared to the industry, below the upper quartile. 10. Profit Margin: 7.49%  Position: Above the lower quartile but between the median and upper quartile.  Implication: Higher profitability than bottom-ranking industry businesses but not as high as top-performing ones. 11. Return on Assets (ROA): 13.44%

ROE = (Net income)/(Total equity) ROE 0.2622 b (Plowback ratio) = (Retained earnings)/(Net income) b 0.5431 b % 54.31 Sustainable growth rate = (ROE x b)/(1-ROE x b) Sustainable growth rate 0.1661 Sustainable growth rate % 16.61 Profit margine = (Net income)/(Sales) Profit margine 0.0749 Dividend payout ratio = (Dividend paid)/(Net income) Dividend payout ratio 0.4569 Sales 185,250,000.00 $ Sales (Projected) 216,020,025.00 $ Change in sale 30,770,025.00 $ EFN = (Assets/Sales)*Change in sales - (Spontaneous liability/Sales)*Change in sales - (Profit margin)*(Projected sales for next year)*(1-Divident payout ratio) or Total assets-Total liablities and equity EFN 7,429,974.87 $  Position: Between the upper quartile and median.  Implication: Higher ability to generate profit from assets compared to median companies in the industry. 12. Return on Equity (ROE): 26.22%  Position: In the range of the upper and median quartiles.  Implication: Marginally below the industry median but surpasses median enterprises in generating profit from shareholders' equity. Question 03 -Calculation of sustainable growth rate of East Coast Yachts. Calculation of EFN and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question with observation Answer 3

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East Cost Yachts' Projected Income statement and the Balance Sheet at 16.61% sustainable growth rate Sales(Projected) 216,020,025.00 $ Cost of goods sold 73.48% 158,735,362.50 $ Other expenses 25,851,270.90 $ Depreciation 7,059,569.40 $ Earnings before interest and taxes (EBIT) 24,373,822.20 $ Inerest 3,890,109.60 $ Taxable income 20,483,712.60 $ Taxes (21%) 4,301,579.65 $ Net income 16,182,132.95 $ EAST COAST YACHTS Pro forma Income Statement Change from current year Change from current year Current assets Current liabilities Cash 3,371,661.54 $ 480,261.54 $ Account payable 6,509,403.42 $ 927,203.42 $ Account receivable 6,065,469.15 $ 863,969.15 $ Notes payable 19,123,771.45 $ 6,502,271.45 $ Inventory 6,800,811.81 $ 968,711.81 $ Total 25,633,174.87 $ 927,203.42 $ Total 16,237,942.50 $ 2,312,942.50 $ Fixed assets Long term debt 33,027,703.42 $ 927,703.42 $ Net plant and equiment 104,136,694.74 $ 14,833,294.74 $ Shareholders' equity Common stock 4,912,000.00 $ - $ Retained earnings 56,801,758.95 $ 8,789,058.95 $ Total equity 61,713,758.95 $ 8,789,058.95 $ Total assets 120,374,637.24 $ 17,146,237.24 $ Total liabilities and equity 120,374,637.24 $ 17,146,237.24 $ EAST COAST YACHTS' Pro forma Balance Sheet Assets Liabilities and Equity

Current ratio 0.63 Quick ratio 0.37 Total asset turnover (TAT) 1.79 Inventory turnover 23.34 Receivables turnover 35.61 Debt ratio 0.49 Debt-equity ratio 0.95 Equity multiplier 1.95 Interest coverage 6.27 Profit margin % 7.49% Return on assest (ROA) % 13.44% Return on equity (ROE) % 26.22% East Cost Yachts - Recalculated - Finanical Ratios

Ques 5 :- Certainly, here's the adjusted External Financing Needed (EFN) calculation with the provided values in a copyable format: Calculations for External Financing Needed (EFN): Provided information: - Total Assets: $103,228,400 - Expected Sales Growth Rate: 20% - Spontaneous Liability (Accounts Payable): $5,582,200 - Profit Margin: Net Income / Sales - Projected Sales for Next Year: Current Sales x (1 + Growth Rate) - Dividend Payout Ratio: Dividends / Net Income - New Fixed Cost: $25,000,000 EFN Formula: EFN = (Assets / Sales) x Change in Sales - (Spontaneous Liability / Sales) x Change in Sales - Profit Margin x Projected Sales x (1 - Dividend Payout Ratio) + New Fixed Cost Steps: 1. Projected Sales for Next Year = $185,250,000 x (1 + 0.20) ≈ $222,300,000 2. Profit Margin = Net Income / Sales ≈ $13,877,140 / $185,250,000 ≈ 0.0749 3. Change in Sales = Projected Sales - Current Sales ≈ $37,050,000 4. Plugging into EFN formula: EFN ≈ ($103,228,400 / $185,250,000) x $37,050,000 - ($5,582,200 / $185,250,000) x $37,050,000 - 0.0749 x $222,300,000 x (1 - 0.457) + $25,000,000 EFN ≈ $20,651,682 - $1,115,045 - $8,504,803 + $25,000,000 EFN ≈ $35,031,834

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In summary, the company will require approximately $35 million in additional financing to fund the expanded production capacity implied by the need for a new production line. This suggests the current capacity is fully utilized.