MINICASE Planning for Growth at S&S Air After 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 lit- the 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 Assets Current assets Cash Accounts receivable Inventory Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (21%) Net income Dividends $ 565,000 Add to retained earnings 1,289,232 Total current assets Total assets Fixed assets Net plant and equipment $ S&S AIR, INC. 2021 Income Statement 419,970 674,475 988,129 $ 2,082,574 S&S AIR, INC. 2021 Balance Sheet $16,305,556 $18,388,130 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: 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, $37,038,492 27,629,530 4,696,692 1,659,882 $ 3,052,388 580,078 $ 2,472,310 618,078 $ 1,854,232 Liabilities and Equity Current liabilities Accounts payable Notes payable Total current liabilities Long-term debt Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity $ 854,685 1,951,642 $ 2,806,327 $ 5,100,000 $ 410,000 10,071,803 $10,481,803 $18,388,130 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
