After Chris completed the ratio analysis for S&s Air, Mark and Todd approached him about planning for next year's sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Christ to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here:

1. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?
2. S&S Air is planning for a growth rate of 12% next year. Calculate the EFN for the company assuming the company is operating at full capacity. Can the company's sales increase at this growth rate?
3. Most assets can be increase as a percentage of sales. For instance, cash can be increased by an amount. However, fixed assets 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 S&S Air is currently producing at 100% capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?

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S&S AIR, INC. 2014 Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income $40,259,230 29,336,446 5,105,100 1,804,220 $ 4,013,464 630,520 $ 3,382,944 1,353,178 $ 2,029,766 $ 610,000 1,419,766 Dividends Add to retained earnings S&S AIR, INC. 2014 Balance Sheet Assets Liabilities and Equity Current assets Cash Accounts receivable Inventory $ 456,435 733,125 1,073,180 Current liabilities Notes payable 2,262,740 Long-term debt $ 929,005 2.121,350 Total current liabilities s3,050,355 5,500,000 Accounts payable Total current assets Fixed assets Net plant and equipment $17.723,430 Shareholder equity Common stock Retained earnings Total equity $ 400,000 815 $11,435,815 $19,986,170 Total assets $19,986,170 Total liabilities and equity