Homework: Financial Analysis of East Coast Yachts
Question 1: Calculation of Financial Ratios for East Coast Yachts
To analyze the financial performance of East Coast Yachts, we will calculate the following
financial ratios:
1.1. Current Ratio
1.2. Quick Ratio
Total Asset Turnover
1.4. Inventory Turnover
.
Receivables Turnover
Debt Ratio
Debt-Equity Ratio
Equity Multiplier
Interest Coverage Ratio
Profit Margin
Return on Assets (ROA)
Return on Equity (ROE)
Question 2: Performance Comparison with the Industry?
Now, we compare these ratios to the industry benchmarks provided in the table
and assess whether each ratio is favorable or unfavorable:
Receivables
Turnover
35.61
11.81
Much higher, indicating quick collection
of receivables.
Debt Ratio
0.487
0.52
Slightly lower debt risk than the
industry.
Debt-Equity
Ratio
0.951
1.08
Lower, meaning slightly less reliance on
debt financing.
Equity
Multiplier
1.95
2.08
Close to industry, indicating similar
leverage levels.
Interest
Coverage
6.26
8.06
Lower, meaning less ability to cover
interest expenses.
Profit Margin
7.49%
6.98%
Higher profitability compared to
industry.
ROA
13.45%
10.53%
Higher, indicating better asset
utilization.
ROE
26.22%
16.54%
Much higher, meaning shareholders
earn more per dollar invested.
The inventory ratio:
The industry does not provide a
benchmark for this, but a lower
ratio indicates better inventory
management
Question 3: Sustainable Growth Rate and EFN?
The Sustainable Growth Rate (SGR) is calculated as:
SGR=ROE×(1−Dividend Payout Ratio)
Using this growth rate, we calculate External Financing Needed (EFN):
EFN = (Assets×Growth Rate) − (Liabilities+Equity×Growth Rate)
EFN = (103,228,400 × 0.1424) − (50,303,700 + 52,924,700 × 0.1424)
EFN=14,690,533 − (50,303,700+7,532,676)
EFN=14,690,533−57,836,376 = −43,145,843
Since EFN is negative, East Coast Yachts does not need additional external
funding at this growth rate.
Question 4: Feasibility of 20% Growth?
With a 20% growth rate, EFN is calculated as:
EFN = (103,228,400 × 0.20) − (50,303,700 + 52,924,700 × 0.20)
EFN = 20,645,680−60,889,640 = −40,243,960
Since the EFN is negative, East Coast Yachts can sustain this growth without
additional funding.
Question 5: New EFN with Fixed Asset Expansion?
If the company invests $25 million in a new production line, the required EFN will be:
EFNnew = −40,243,960 + 25,000,000
EFNnew= −15,243,960
Since EFN is still negative, the company can self-finance expansion.
Conclusion
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
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East Coast Yachts has strong financials, with higher profitability and
efficiency than industry standards.
The company can sustain a 20% growth rate without needing external
financing.
The additional $25 million investment will not require external funding.
The company can expand without risking liquidity, but should monitor
interest coverage.