CaseStudy – Ratios and Financial Planning

In 1969, Tom Warren founded East Coast Yachts. The company’s operations are located near Hilton Head Island, South Carolina, and the company is structured as a sole proprietorship. The company has manufactured custom midsize, high-performance yachts for clients, and its products have received high reviews for safety and reliability. The company’s yachts have also recently received the highest award for customer satisfaction. The yachts are primarily purchased by wealthy individuals for pleasure use. Occasionally, a yacht is manufactured for purchase by a company for business purposes.

The custom yacht industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity. For instance, East Coast Yachts will spend 80 to 100 hours on hand-buffing the stainless steel stem-iron, which is the metal cap on the yacht’s bow that conceivably could collide with a dock or another boat.

Several years ago, Tom retired from the day-to-day operations of the company and turned the operations of the company over to his daughter, Larissa.

Because of the dramatic growth at East Coast Yachts, Larissa decided that the company should be reorganized as a corporation and, today, the company is publicly traded under the ticker symbol “ECY.”

Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and also to evaluate the company’s financial performance. Dan graduated from college five years ago with a finance degree, and he has been employed in the treasury department of a Fortune 500 company since then.

The company’s past growth has been somewhat hectic, in part due to poor planning. In anticipation of future growth, Larissa has asked Dan to analyze the company’s cash flows. The company’s financial statements are prepared by an outside auditor.

After Dan’s analysis of East Coast Yachts’ cash flow (at the end of our previous chapter), Larissa approached Dan about the company’s performance and future growth plans. First, Larissa wants to find out how East Coast Yachts is performing relative to its peers. Additionally, she wants to find out the future financing necessary to fund the company’s growth. In the past, East Coast Yachts experienced difficulty in financing its growth plan, in large part because of poor planning. In fact, the company had to turn down several large jobs because its facilities were unable to handle the additional demand. Larissa hoped that Dan would be able to estimate the amount of capital the company would have to raise next year so that East Coast Yachts would be better prepared to fund its expansion plans.

To get Dan started with his analyses, Larissa provided the following financial statements. Dan then gathered the industry ratios for the yacht manufacturing industry.

East Coast Yachts 2023 Income Statement
Item	Income
Sales	$495,381,600
Cost of goods sold	$357,466,500
Selling, general, and administrative	$ 59,200,300
Depreciation	$ 16,166,700
EBIT	$ 62,548,100
Interest expense	$ 8,910,000
EBT	$ 53,638,100
Taxes (25%)	$ 13,409,525
Net Income	$ 40,228,575
Dividends	$ 17,437,050
Retained earnings	$ 22,791,525

East Coast Yachts 2023 Balance Sheet
Current Assets	Amount	Current Liabilities	Amount
Cash and equivalents	$ 9,096,300	Accounts payable	$ 36,146,575
Accounts receivable	$ 15,131,900	Accrued expenses	$ 5,151,400
Inventory	$ 16,322,100	Total current liabilities	$ 41,297,975
Other	$ 949,400
Total current assets	$ 41,499,700
Fixed assets		Long-term debt	$137,200,000
Property, plant, and equipment	$370,828,800	Total long-term liabilities	$137,200,000
Less accumulated depreciation	(92,206,700)
Net property, plant, and equipment	$278,622,100
Intangible assets and others	$ 6,094,800	Stockholders’ equity
Total fixed assets	$284,716,900	Preferred stock	$ 1,595,700
		Common stock	$ 29,057,000
		Capital surplus	$ 24,178,000
		Accumulated retained earnings	$131,382,725
		Less treasury stock	(38,494,800)
		Total equity	$ 147,718,625
Total assets	$326,216,600	Total liabilities and shareholders’ equity	$326,216,600

Yacht Industry Ratios
Ratio	Lower Quartile	Median	Upper Quartile
Current ratio	.86	1.51	1.97
Quick ratio	.43	.75	1.01
Total asset turnover	1.10	1.27	1.46
Inventory turnover	12.18	14.38	16.43
Receivables turnover	10.25	17.65	22.43
Debt ratio	.32	.56	.61
Debt-equity ratio	.83	1.13	1.44
Equity multiplier	1.83	2.13	2.44
Interest coverage	5.72	8.21	10.83
Profit margin	5.02%	7.48%	9.05%
Return on assets	7.05%	10.67%	14.16%
Return on equity	14.06%	19.32%	26.41%

Paper Directions

Write a case analysis of 2,000 – 2,500 words (8 to 10 pages), content (title page and reference page not included) in proper APA format, covering the following requirements:

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?

2. Calculate all of the ratios listed in the industry table for East Coast Yachts for 2023. (Use Excel to do the calculations, then copy and paste them into your paper).

3. Compare the performance of East Coast Yachts to the industry as a whole. For each ratio, use decision criteria and 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 would you interpret this ratio? How does East Coast Yachts compare to the industry average for this ratio?

4. Calculate the sustainable growth rate for East Coast Yachts. Calculate external funds needed (EFN) and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate all of the ratios in the previous question given these new criteria. What does your analysis conclude? (Use Excel to do the calculations, then copy and paste them into your paper).

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?

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 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 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 $75 million. Prepare the pro forma income statement and balance sheet given these new criteria. What is the new EFN with these assumptions? What does this imply about capacity utilization for East Coast Yachts next year? (Use Excel to do the calculations, then copy and paste them into your paper).

Struggling with where to start this assignment? Follow this guide to tackle your assignment easily!

Below is a structured, tutor-style guide to help you plan, compute, and write your full 8–10 page case-study paper.

⭐ Step-by-Step Writing Guide for Your Case Study

Step 1: Write an Engaging Introduction

Your introduction should include:

A brief overview of East Coast Yachts
A summary of the purpose of your financial analysis
A roadmap of what your paper will address

Aim for 1–2 paragraphs.

Step 2: Create Section Headings That Match Each Assignment Requirement

Your paper must have the following clearly separated sections:

1. Should Preferred Stock Be Included in Total Equity?

2. Ratio Calculations for East Coast Yachts (2023)

3. Performance Comparison to the Industry

4. Sustainable Growth Rate, EFN, and Pro Forma Statements

5. Feasibility of 20% Growth Without External Equity

6. New Production Line, EFN, and Capacity Utilization

Use complete paragraphs—no bullet points.

Step 3: Section 1 — Preferred Stock and Equity

Explain:

How preferred stock is treated in financial reporting
Whether preferred stock is considered part of shareholders’ equity
The conceptual reasoning (claims on assets, dividends, etc.)
Why including or excluding it affects ratio interpretation

This section should be about 2 paragraphs.

Step 4: Section 2 — Ratio Calculations

In Excel, calculate all 14 industry ratios:

Current ratio
Quick ratio
Total asset turnover
Inventory turnover
Receivables turnover
Debt ratio
Debt-to-equity
Equity multiplier
Interest coverage
Profit margin
ROA
ROE
Inventory ÷ Current Liabilities (your new ratio)
Any additional ratios needed

After you compute them in Excel:

Copy & paste the values (not the spreadsheet) into this section.
Provide brief explanations of what each ratio measures.

Target length: 1–2 pages.

Step 5: Section 3 — Compare East Coast Yachts to the Industry

For each ratio:

Compare ECY to lower quartile / median / upper quartile
State whether performance is strong or weak
Provide reasoning (liquidity risk, leverage, efficiency, profitability)
Explain what your new ratio (Inventory ÷ Current Liabilities) indicates
Interpret where ECY stands relative to the industry

This is one of your longest sections (2–3 pages).

Step 6: Section 4 — Sustainable Growth Rate (SGR) + EFN

You will calculate:

Sustainable Growth Rate (SGR)

Use the standard formula:

SGR = ROE × (1 – Dividend Payout Ratio)

Then compute:

External Funds Needed (EFN)

Using percent-of-sales forecasting.

Pro Forma Income Statement & Balance Sheet

Assume the company grows exactly at the SGR.
Then:

Recalculate all ratios under the new pro forma numbers:

Liquidity
Efficiency
Leverage
Profitability

Finally, discuss:

Whether the SGR supports internal financing
Whether the company can grow without issuing new equity

This section is typically 2–3 pages.

Step 7: Section 5 — Feasibility of 20% Growth (No External Equity)

Discuss:

Whether a 20% growth rate exceeds the SGR
The likely EFN required
The consequences of financing only with debt
Impact on leverage, risk, and ratios
Recommendations for Larissa
- (credit line, long-term debt, adjusting dividend policy, stretching payables, etc.)

Aim for 1–1.5 pages.

Step 8: Section 6 — Lumpy Fixed Costs & New Production Line

Given:

ECY at 100% capacity
A 20% sales increase requires a $75M new production line

You must:

Build new pro forma financial statements
Recalculate EFN
Interpret capacity utilization implications

Discuss:

Why lumpy assets cause discontinuous jumps in EFN
How much financing will now be required
Risks associated with this expansion

Step 9: Write a Strong Conclusion

Summarize:

ECY’s current financial health
Ratio strengths/weaknesses
The viability of ECY’s growth strategy
Your recommendations

Step 10: Include Your Reference List (APA 7th Edition)

You may copy and paste your reference list.
Place it at the end of your paper.

📚 Helpful Resource Links You Can Use

These are reliable, academic-friendly finance resources you may cite:

If you want, I can also:
✅ Build your Excel ratio table
✅ Build your SGR + EFN calculations
✅ Build your pro forma statements
Just say “Create the Excel calculations for me” and I’ll generate everything.

East Coast Yachts Financial Ratio Analysis and Growth Planning Case Study