Page 123 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 little planning for investment needs. As a result, the company experienced some challeng- ing times because of cash flow problems. 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. 2014 Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income Dividends $ 610,000 Add to retained earnings 1,419,766 $40,259,230 29,336,446 5,105,100 1,804,220 $ 4,013,464 630,520 $ 3,382,944 1,353,178 $ 2,029,766 Assets Current assets Cash Accounts receivable Inventory Total current assets Fixed assets Net plant and equipment S&S AIR, INC. 2014 Balance Sheet Liabilities and Equity Current abilities $ 456,435 Accounts payable $ 920,000 733,125 Notes payable 2,121,350 1.073,180 Total current liabilities $ 3,050,355 $ 2,202,740 Long-term debt $ 5,500,000 $17,723,430 Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity $ 400.000 11,035,815 $11.435,815 $19.980,170 Total assets $19,960,170 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 per- cent next year. Calculate the EFN for the company assuming the company is operating at full capaci- ty. 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 "lumpy" fixed cost structure. Assume S&S Air is currently 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