Planning for Growth at 585 Air After Chris completed the ratio analysis for 585 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 challenging 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. BAS AIL. ING 3021 inconte Starterent Sales $37,038.493 Cost of goods sold 27.630.530 Other expenses 4,608 603 Taxable income $ 2.472.310 Net income $ 1.854.232 Dividends $ 565.000 Add to retained eamings 1.289.232 SAS AIR, INC. 3031 Balance Sheet Unbrides and Cq-boy Current ansub Cument Inabiram Cash $ 418.670 Accounts papible $ 854685 Accounts receivable Notes payable 1,951,647 Inventory Total current Isbitties $ 3.0108 327 Total current assets Long-term debt $ 6.109090 Not plant and equipment $16,305 556 Shareholder equity Common stock 1 4101006 Atnined samings 10 071.803 Total equity $10 481,803 Total masata Totel liabilities and equity $18,368, 130 QUESTIONS 1. Calculate the internal growth rate and sustainable growth rate for 5&5 Air. What do these numbers mean? QUESTIONS 2. 585 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? QUESTIONS 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 585 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