#3: Most assets can be increased as a percentage of sales. For instance, cash can be increased by any 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 cur- rently producing at 100 percent 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?

Planning for Growth at S&S Air Aer Chris completed the ratio analysis for S&S Air (see Chapter 3). 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 ex perienced come challenging times because of cash flow prob lems. 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 Chris 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 S&S AIR, INC. 2018 Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (215) Net Income Dividends $ 705.000 Add to retained earnings 1,612,789 $46.298,115 34.536.913 5,870,865 2074 853 $ 3.815,484 725098 $ 3,090.386 772597 $ 2,317,789 I Assets Current assets Cash Accounts receivable Inventory Total current assets Fixed assets Net plant and equipment S&S AIR, INC 2018 Balance Sheet Liables and Equity Current liabilities $ 524,963 Accounts payable $ 1.068 356 843,094 Notes payable 2.439,553 1.235.161 Total current abilities $ 3,507,909 $ 2.603.218 Long-term debt $ 6,300,000 $20,381,945 Shareholder equity Common stock Retained earings Total equity Total abilities and equity $ 450,000 12.717254 $13,77.254 $22.985,163 Total assets $22,985,163 QUESTIONS 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 percent 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 increased as a percentage of sales. For instance, cash can be increased by any 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 "Tumpy" fixed cost structure. Assume S&S Air is cur- rently producing at 100 percent 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