Question No. 1:
Calculate all of the ratios listed in the industry table for East
Coast Yachts.
Ratio
Current Ratio
Quick Ratio
Total Asset
Turnover Ratio
Inventory Turnover
Ratio
Receivable
Turnover Ratio
Debt Ratio
Debt-Equity Ratio
Equity Multiplier
Interest Coverage
Profit Margin
Formula
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Calculation
14.651.000
19.539.000
14.651.000 − 6.316.000
19.539.000
167.310.000
108.615.000
𝐶𝑂𝐺𝑆
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
117.910.000
6.136.000
𝑆𝑎𝑙𝑒𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
167.310.000
5.437.000
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
108.615.000 − 55.342.000
108.615.000
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
53.274.000
55.341.000
108.615.000
55.341.000
𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
23.946.000
3.009.000
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑆𝑎𝑙𝑒𝑠
12.562.200
167.310.000
Answer
0.74 Times
0.43 Times
1.54 Times
19.2 Times
30.57 Times
0.49 Times
0.96 Times
1.96 Times
7.96 Times
7.5%
Return on Assets
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Return on Equity
11.5%
12.562.200
108.615.000
12.562.200
55.341.000
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
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?
Liquidity Ratios Comparison ( Times)
Quick Ratio
Current Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%
Current Ratio
0,5
Quick Ratio
0,21
MEDIAN
1,43
0,38
UPPER QUARTILE
1,89
0,62
EAST COAST YACHTS
0,75
0,44
LOWER QUARTILE
90%
100%
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.
Turnove Ratios Comparison
Receivables Turnover
Inventory Turnover
Total Asset Turnover
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Total Asset Turnover
0,68
Inventory Turnover
4,89
Receivables Turnover
6,27
MEDIAN
0,85
6,15
9,82
UPPER QUARTILE
1,38
10,89
14,11
EAST COAST YACHTS
1,54
19,22
30,57
LOWER QUARTILE
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.
Long Term Solvency Ratios Comparison
Equity Multiplier
Debt-Equity-Ratio
Debt Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Debt Ratio
0,44
Debt-Equity-Ratio
0,79
Equity Multiplier
1,79
MEDIAN
0,52
1,08
2,08
UPPER QUARTILE
0,61
1,56
2,56
EAST COAST YACHTS
0,49
0,96
1,96
LOWER QUARTILE
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.
Coverage Ratios Comparison
Interest Coverage
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Interest Coverage
5,18
LOWER QUARTILE
MEDIAN
8,06
UPPER QUARTILE
9,83
EAST COAST YACHTS
7,96
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.
Profitibility Ratios Comparison
ROE
ROA
Profit Margin
0%
LOWER QUARTILE
20%
Profit Margin
4,05%
40%
60%
ROA
6,05%
80%
ROE
9,93%
MEDIAN
6,98%
10,53%
16,54%
UPPER QUARTILE
9,87%
13,21%
26,15%
EAST COAST YACHTS
7,51%
11,57%
22,70%
100%
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
Reason
Liquidity Ratios
Positive
Short Term Solvency Position of East Coast is
good as compared to Industry.
Turnover Ratios
Positive
Coverage Ratios
Negative
Turnover Ratios are all positive as compared to
Industry
Interest Paying Ability is not very good Overall.
Long Term Solvency
Ratios
Profitability Ratios
Negative
Long Term paying ability is not too good as
compared to Industry.
Positive
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
Sales
Cost of Goods Sold
Other Expenses
Depreciation (No Change)
EBIT
Interest (No Change)
Taxable Income
Taxes (40%)
Net Income
Dividends
Addition to RE
Amount By Growth
Rate of 9.08%
18,25,01,748
(12,86,16,228)
(2,18,09,455.2)
(5,460,000)
26616064.8
(3,009,000)
2360,70,64.8
(94,42,826)
14,16,42,39
88,21,708.6
53,42,530
BALANCE SHEET AS ON 2009
Assets
Current Asset
Cash
Account Receivables
Inventory
Total Current Asset
Fixed Assets
Net Plant & Equipment
Total Assets
Amount
Liabilities & Equity
Current Liability
33,18,213.6
Account Payable
59,69,948.4
Notes Payable
66,93,148.8 Total Current Liability
1,29,81,301.8
Long Term Debt
(No Change)
10,24,95,931.2
SHAREHOLDER'S
EQUITY
Common Stock
Retained Earnings
Total Equity
11,84,77,242 Total Liabilities & Equity
Amount
70,47,658.8
1,42,65,482.4
2,13,13,141.2
3,37,35,000
56,72 160
5,56,93,802.8
6.03.65,962.8
11,54,14,104
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
= 11,84,77,242 - 11,54,14,104
= 30, 63,186
RATIO ANALYSIS WITH SUSTAINABLE GROWTH RATE OF 9.08%
Ratio
Current Ratio
Quick Ratio
Total Asset
Turnover Ratio
Inventory Turnover
Ratio
Receivable
Turnover Ratio
Debt Ratio
Debt-Equity Ratio
Equity Multiplier
Interest Coverage
Profit Margin
Return on Assets
Return on Equity
Formula
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Calculation
1,29,81,301.8
2,13,13,141.2
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 1,29,81,301.8 − 66,93,148.8
2,13,13,141.2
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
18,25,01,748
11,84,77,242
𝐶𝑂𝐺𝑆
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
12,86,16,228
66,93,148.8
𝑆𝑎𝑙𝑒𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
18,25,01,748
59,69,948.4
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
11,84,77,242 − 6.03.65,962.8
11,84,77,242
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
2,13,13,141.2 + 3,37,35,000
6.03.65,962.8
11,84,77,242
6.03.65,962.8
𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
26616064.8
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑆𝑎𝑙𝑒𝑠
14,16,42,39
18,25,01,748
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
14,16,42,39
11,84,77,242
14,16,42,39
6.03.65,962.8
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
Answer
0.60 Times
0.29 Times
1.54 Times
19.2 Times
30.57 Times
0.49 Times
0.91 Times
1.96 Times
7.96 Times
3,009,000
7.76%
11.9%
23.46 %
Comparison of Ratios with and without Sustainable Growth Rate
Ratio
Without Sustainable
Growth Rate
With Sustainable
Growth Rate
(9.08%)
Effect
0.74 Times
0.60 Times
A Little Bit
Change
0.43 Times
0.29 Times
A Large Change
Total Asset Turnover
Ratio
1.54 Times
1.54 Times
No Effect
Inventory Turnover
Ratio
19.2 Times
19.2 Times
No Effect
Receivable Turnover
Ratio
30.57 Times
30.57 Times
No Effect
Debt Ratio
0.49 Times
0.49 Times
No Effect
Debt-Equity Ratio
0.96 Times
0.91 Times
A Little Bit
Change
Current Ratio
Quick Ratio
Equity Multiplier
1.96 Times
1.96 Times
No Effect
Interest Coverage
7.96 Times
7.96 Times
No Effect
Profit Margin
2.5%
7.76%
A Large Change
Return on Assets
11.5%
11.9%
No Effect
Return on Equity
22.6%
23.46 %
A Little Bit
Change
11,90%
11,50%
0,12
0,1
7,76%
0,08
0,06
0,04
2,50%
0,02
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0
Without Sustainable Growth Rate
With Sustainable Growth Rate (9.08%)
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
Sales
Cost of Goods Sold
Other Expenses
Depreciation (No Change)
EBIT
Interest (No Change)
Taxable Income
Taxes (40%)
Net Income
Dividends
Addition to RE
Amount (Growth
Rate 20%)
20,07,72,000
14,14.92,000
2,39,92,800
54,60,000
2,98,27,200
30,09,000
2,68,18,200
1,07,27,280
1,60,90,920
96,54,552
64.36,368
BALANCE SHEET AS ON 2009
Assets
Current Asset
Cash
Account Receivables
Inventory
Total Current Asset
Fixed Assets
Net Plant & Equipment
Amount
Liabilities & Equity
Current Liability
36,50,400
Account Payable
65,67,600
Notes Payable
73,63,200 Total Current Liability
1,75,81,200
Long Term Debt
(No Change)
11,27,56,800
SHAREHOLDER'S
EQUITY
Common Stock
Retained Earnings
Total Equity
13,03,38,000
Total Assets
Total Liabilities & Equity
Amount
77,53,200
1,56,3,600
2,34,46,800
3,37,35,000
52,00,000
5,65,77,368
6,17,77,368
11,89,59,168
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
= 13,03,38,000 - 11,89,59,168
= 1,13,78,832
Conclusion:
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 $
1,13,78,832
Question No. 5
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 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 million
 New Total Fixed Assets = 93,964,000 + 30,000,000
= 12,39,64,000
Effect on Depreciation
New 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
Sales
Cost of Goods Sold
Other Expenses
Depreciation
EBIT
Interest (No Change)
Taxable Income
Taxes (40%)
Net Income
Dividends
Addition to RE
Amount (Growth
Rate 20%)
20,07,72,000
(14,14.92,000)
(2,39,92,800)
(72,03,221)
2,80,83,979
(30,09,000)
2,50,74,979
(1,00,29,992)
1,50,44,988
(96,54,552)
60,17,995
BALANCE SHEET AS ON 2009
Assets
Current Asset
Cash
Account Receivables
Inventory
Total Current Asset
Fixed Assets
Net Plant & Equipment
Total Assets
Amount
Liabilities & Equity
Current Liability
36,50,400
Account Payable
65,67,600
Notes Payable
73,63,200 Total Current Liability
1,75,81,200
Long Term Debt
(No Change)
12,39,64,000
SHAREHOLDER'S
EQUITY
Common Stock
Retained Earnings
Total Equity
14,15,45,200
Total Liabilities & Equity
Amount
77,53,200
1,56,3,600
2,34,46,800
3,37,35,000
52,00,000
5,65,77,368
6,17,77,368
11,89,59,168
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
= 2,25,86,032
.
Conclusion:
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