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.