3. When forecasting, many assets can be forecast to increase as a percentage of sales. However, fixed assets often must be increased by forecasting specific amounts because it is impossible 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 production line at a cost of $25 million. How would the financial forecast be impacted? What additional assumptions would be required? What would be the implications of those assumptions?

EAST COAST YACHTS 2022 Income Statement SalesCostofgoodssoldOtherexpensesDepreciationEarningsbeforeinterestandtaxes(EBIT)InterestTaxableincomeTaxes(21%)Netincome$185,250,000136,125,00022,169,0006,054,000$20,902,0003336,000$17,566,0003,688,860$13,877,140 Dividends Additions to retained earnings $6,340,0007,537,140 EAST COAST YACHTS Balance Sheet as of December 31, 2022 Assets Liabilities and Equity Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment Current liabilitics Accounts payable Notes Total $5,582,200 12,621,500 $18,203,700 $32,100,000 Shareholders' equity Common stock Retained earning5 Total assets $103,228,400 Total liabilities and equity $4,912,000 48,012,700 $52,924,700 $103,228,400 Yacht Industry Ratios \begin{tabular}{lrrr|} \hline & Lower Quartile & Median & Upper Quartile \\ \hline Current ratio & 50 & 1.43 & 1.89 \\ Quick ratio & .21 & .38 & .62 \\ Total asset turnover & .68 & .85 & 1.38 \\ Inventory turnover & 6.85 & 9.15 & 16.13 \\ Receivables turnover & 6.27 & 11.81 & 21.45 \\ Debt ratio & .44 & 52 & .61 \\ Debt-equity ratio & .79 & 1.08 & 1.56 \\ Equity multiplier & 1.79 & 2.08 & 2.56 \\ Interest coverage & 5.18 & 8.06 & 9.83 \\ Profit margin & 4.05% & 6.98% & 9.87% \\ Return on assets & 6.05% & 10.53% & 15.83% \\ Return on equity & 9.93% & 16.54% & 28.14% \end{tabular}