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 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: S&S Air, Inc. S , 2018 Income Statement Sales $46,298,115 34,536,913 Cost of goods sold Other expenses Depreciation 5,870.865 2,074,853 EBIT $ 3,815,484 Interest 725,098 Taxable income $ 3,090,386 Taxes (21%) 772,597 Net income $ 2.317.789 Dividends $ 705.000 Add to retained earnings 1,612,789 S&S Air, Inc. 2018 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash $ 524,963 Accounts payable $ 1.068,356 Accounts receivable 843.094 Notes payable 2.439,553 Inventory 1.235.161 Total current liabilities $ 3,507,909 Total current assets $ 2,603,218 Long-term debt $ 6,300,000 Fixed assets Net plant and equipment $20,381,945 Shareholder equity Common stock S $ 460,000 Retained earnings 12.717.254 Total equity $13.177.254 Total assets $22.985.163 Total liabilities and equity $22.985.163 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, 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
