PLANNING for GROWTH

After Chris completed the ratio analysis for S&S Air $,$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 faced some challenging times becaues 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. So Chris is asked to prepare a financial plan for next year.

The financial data are provided below.

S&S AIR, INC.

$2022$ Income Statement

Sales $ $40,259,230$

Cost of goods sold $ $29,336,446$

Other expenses $ $5,105,100$

Depreciation $ $1,804,220$

EBIT $ $4,013,464$

Interest $ $630,520$

Taxable income $ $3,382,944$

Taxes $(40\%)$ $ $1,353,178$

Net income $ $2,029,766$

Dividends $ $610,000$

Add to retained earnings $ $1,419,766$

$$

S&S AIR, INC.

$2022$ Balance Sheet

Assets Liabilities and Equity

aCurrent assets Current liabilities

Cash $ $456,435$ Accounts payable $ $929,005$

Accounts receivable $733,125$ Notes payable $2,121,350$

Inventory $1,073,180$ Total current liabilities $ $3,050,355$

Total current assets $ $2,262,740$

Long$-$term debt $ $5,500,000$

Fixed assets

Net plant and equipment $ $17,723,430$ Shareholder equity Common stock $ $400,000$

Retained earnings $11,035,815$

Total equity $ $11,435,815$

Total assets $ $19,986,170$ Total liabilities and equity $ $19,986,170$

QUESTIONS:

$1.$Calculate the internal growth rate and sustainable growth rate for S&S Air.What do they mean?

$2.$S&S Air is planning to grow at a rate of $12\%$ next year.

a$.$Calculate the EFN for the company assuming that the company is operating at full capacity and fixed assets will grow at this rate.

b$.$Can the company$$s sales grow at this rate? Explain what measures it should take.

c$.$What are some factors that affect the sustainable growth rate?

$3.$Most assets are increased as a percentage of sales $.$For instance $,$cash can be increased by any amount.However, fixed assets can be increased in specific amounts because it is impossible to buy part of the new plant or machine.In this case the company has a stair case or lumpy fixed cost structure.Assume that S&S Air is currently producing at $100\%$ capacity.As a result,to increase production $,$the company must set up an entirely new line at a cost of $$5,000,000.$

a$.$Calculate the new EFN with this assumption? $($ Hint:Calculate the new depreciation expense and addition to retained earnings$)$

b$.$What does this imply for capacity utilization next year?

$4.$How should the company finance this EFN? Why?

$5.$Compare the ratios of company before and after the growth is realized $?$ Does the PSM projection overstate or distort some accounts? Explain.