Chris was recently hired by CA 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 FP500 company since then.

CA Air was founded 10 years ago by friends Mark and Todd. 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, the Eagle which sells for $78,000.

While the company manufactures aircraft, its operations are different from commercial aircraft companies. CA Air builds aircraft to order. By using prefabricated parts, the company is able to complete the manufacture of an airplane in only 5 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.

CA Air, Inc. Income Statement 2007
Sales	$ 12,870,000
Cost of Goods Sold	$ 9,070,000
Other Expenses	$ 1,538,000
Depreciation	$ 420,000
EBIT	$ 1,842,000
Interest	$ 231,500
Taxable Income	$ 1,610,500
Taxes (40%)	$ 644,200
Net Income	$ 966,300
Dividends	$ 289,890
Add. To retained earnings	$ 676,410

CA Air Inc. Balance Sheet 2007
Assets			Liabilities & Equity
Cash	$234,000		Current liabilities
Accounts Receivable	$421,000		Accounts payable	$497,000
Inventory	$472,000		Notes payable	$1,006,000
Total current assets	$1,127,000		Total Current liabilities	$1,503,000
Fixed assets
Net plant and equipment	$7,228,000		Long Term Debt	$2,595,000
			Shareholder Equity
			Common Stock	$100,000
			Retained earnings	$4,157,000
			Total equity	$4,257,000
Total assets	$8,355,000		Total liabilities and equity	$ 8,355,000

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 following ratios for CA Air: Current Ratio, quick ratio, cash ratio, total asset turnover, inventory turnover, receivables turnover, total debt ratio, debt equity ratio, equity multiplier, times interest earned, cash coverage ratio, profit margin, return on assets, and return on equity.

Mark and Todd agree that a ratio analysis can provide a measure of the companys performance. They have chosen Boeing as an aspirant company. Would you choose Boeing as an aspirant company? Why or why not?

Compare the performance of CA Air to the industry. For each ratio comment on why it might be viewed as a positive or negative relative to the industry. Suppose you create an inventory ratio calculated by inventory divided by current liabilities. How do you think CA Airs ratio would compare to the industry average?

Calculate the internal growth rate and sustainable growth rate for CA Air. What do these numbers mean?

Preparing the Case Analysis

Step 1. Define the problem - Be sure to identify the problem and not the symptom of a problem. For example, a decline in sales is a symptom of a problem; you must identify the actual cause of the decline in sales.

Step 2. Formulate alternative solutions to the problem - It may be helpful to brainstorm as many solutions as you can and then narrow your list down to three or four solutions you feel are the strongest.

Step 3. Evaluate and compare the alternative solutions - To evaluate alternative solutions you should consider their strengths (e.g. increased productivity) and their weaknesses (e.g. increased cost).

Step 4. Recommend and justify an effective solution - Be sure to record the reasons why the chosen solution is most effective. Provide a recommendation that is supported by your analysis.