QUESTION B

sas Air, Inc. 2012 Income Statement

Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income Dividends

Add to retained earnings

$560,000 977,452 22224,580 3,867,500 s 3.040 660 478,240 s 2,562,420 1,024,968 s 1,537.452

Planning for Growth at SCS Air After Chris completed the ratio analysis for S&S Air (see Chap^s ter 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 of cash flow problems. The lack of planning resulted in missed sales, as ^s,sell 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: sas Air, Inc. 2012 Balance Sheet Assets

Liabilities and Equity

Current assets Accounts receivable inventory

Total current assets

Fixed assets Net plant and equipment Total assets

$ 441,000

508,400 1237.120 s 2,186.520

S16.122 400

S18.308.920

Current liabilities Accounts payable s 689,000 Notes payable 2, 230,000 Total current liabilities $ 2.919000 Long-term debt s 5.320000 Shareholder equity Common stock s 350,000 Retained earnings 9.719.920 Total equity l0.069,920 Total liabilities and equity 18,308,920 QUESTIONS Calculate the internal growth rate and sustainable growth rate for S&S Air. 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 com. pany 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 0.00 Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year