Planning for Growth at S&S Air, Inc.

After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next years 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:

Chapter 4 Case Study_Lab.xlsx

QUESTIONS

1. Calculate the internal growth rate and sustainable growth rate for S&S Air.
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.
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?

Deliverables

1. Completed MS Excel spreadsheet upload that includes all assumptions from the Questions, all appropriate outcomes and formatting to the Pro Forma Income Statement and Balance Sheet, EFN and calculated growth rates. (10 points)
2. MS Word file that includes answers to the following questions:
   1. Can S&S Air achieve the 12% growth rate without raising additional capital? Explain. (5points)
   2. Given the calculated EFN, what is your recommendation to S&S Air for raising capital? Be specific on which financing option to select and why.

B F G S&S Air, Inc. S&S Air, Inc. 1 2018 Income Statement 2018 Balance Sheet 2 Liabilities & Equity Sales $46,298,115.00 Assets 3 34,536,913.00 Current Liabilities COGS Current Assets 4 Other Expenses $1,068,356.00 5,870,865.00 Cash $524,963.00 A/P 5 Depreciation 2,074,853.00 Notes Payable A/R 843,094.00 1,235,161.00 2,439,553.00 6 $3,815,484.00 Total Current liabilities $3,507,909.00 EBIT Inventory 7 Interest 725,098.00 Total Current Assets $2,603,218.00 8 $3,090,386.00 Taxable Income Long-term debt $6,300,000.00 772,596.50 Fixed assets $20,381,945.00 xes 10 $2,317,789.50 Common Stock 460,000.00 Net Income 11 Retained earnings 12,717,254.00 12 Total equity Dividends $705,000.00 $13,177,254.00 13 Total assets $22,985,163.00 Total Liabilties & equity Addition to RE 1,612,789.50 $22,985,163.00 14 15 25% Tax Rate 16 17 18 19 20 21 22 23 24 25 26 Sheet1 B F G S&S Air, Inc. S&S Air, Inc. 1 2018 Income Statement 2018 Balance Sheet 2 Liabilities & Equity Sales $46,298,115.00 Assets 3 34,536,913.00 Current Liabilities COGS Current Assets 4 Other Expenses $1,068,356.00 5,870,865.00 Cash $524,963.00 A/P 5 Depreciation 2,074,853.00 Notes Payable A/R 843,094.00 1,235,161.00 2,439,553.00 6 $3,815,484.00 Total Current liabilities $3,507,909.00 EBIT Inventory 7 Interest 725,098.00 Total Current Assets $2,603,218.00 8 $3,090,386.00 Taxable Income Long-term debt $6,300,000.00 772,596.50 Fixed assets $20,381,945.00 xes 10 $2,317,789.50 Common Stock 460,000.00 Net Income 11 Retained earnings 12,717,254.00 12 Total equity Dividends $705,000.00 $13,177,254.00 13 Total assets $22,985,163.00 Total Liabilties & equity Addition to RE 1,612,789.50 $22,985,163.00 14 15 25% Tax Rate 16 17 18 19 20 21 22 23 24 25 26 Sheet1