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Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the companys performance. Chris graduated

Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the companys performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then.

S&S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the companys products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models; the Birdie, which sells for $53,000, and the Eagle, which sells for $78,000.

Although the company manufactures aircrafts, its operations are different from commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated parts, the company can complete the manufacture of an airplane in only five weeks. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial airplane may take one and one-half to two years to manufacture once the order is placed.

Mark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry:

S&S Air, INC.

2009 Income Statement

Sales

$30,499,420

Cost of goods sold

$22,224,580

Other expenses

$3,867,500

Depreciation

$1,366,680

EBIT

$3,040,660

Interest

$478,240

Taxable income

$2,562,420

Taxes (40%)

$1,024,968

Net income

$1,537,452

Dividends

$560,000

Add to retained earnings

$977,452

S&S Air, INC.

2009 Balance Sheet

Assets

Liabilities and Equity

Current assets

Current liabilities

Cash

$441,000

Accounts payable

$889,000

Accounts receivable

$708,400

Notes payable

$2,030,000

Inventory

$1,037,120

Total current liabilities

$2,919,000

Total current assets

$2,186,520

Long term debt

$5,320,000

Fixed assets

Net plant and equipment

$16,122,400

Shareholder equity

Common stock

$350,000

Retained earnings

$9,719,920

Total equity

$10,069,920

Total assets

$18,308,920

Total liabilities and equity

$18,308,920

Light Airplane industry ratios

Lower quartile

Median

Upper quartile

Current ratio

0.5

1.43

1.89

Quick ratio

0.21

0.38

0.62

Cash ratio

0.08

0.21

0.39

Total asset turnover

0.68

0.85

1.38

Inventory turnover

4.89

6.15

10.89

Receivables turnover

6.27

9.82

14.11

Total debt ratio

0.44

0.52

0.61

Debt-equity ratio

0.79

1.08

1.56

Equity multiplier

1.79

2.08

2.56

Times interest earned

5.18

8.06

9.83

Cash coverage ratio

5.84

8.43

10.27

Profit margin

4.05%

6.98%

9.87%

Return on assets

6.05%

10.53%

13.21%

Return on equity

9.93%

16.54%

26.15%

Calculate the internal growth rate (IGR) and sustainable growth rate (SGR) for S&S Air

Calculate the external financing needed (EFN) assuming 12% growth rate and full capacity operation. Use Excel to create pro-forma financial reports.

Assume that the company, currently operating at full capacity, cannot simply increase fixed assets by 12%. Instead, the firm must buy a new line of business at a cost of 5 million dollars. Calculate the external financing needed (EFN) and capacity utilization for next year. Use Excel to create pro-forma financial statements and clearly explain your thinking and calculations.

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