Planning for Growth at S&S Air

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 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:

QUESTIONS

Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these

numbers mean?

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?

$-73.$ 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?