Round all answers to 2 decimals and all intermediate work to 4 decimals.

Planning for Growth at S&S Air S&S Air, Inc. 2012 Income Statement After Chris completed the ratio analysis for S&S Air (see Chap- Sales $30,499,420 ter 3), Mark and Todd approached him about planning for next Cost of goods sold 22,224,580 year's sales. The company had historically used little planning 3,867,500 for investment needs. As a result, the company experienced some Other expenses challenging times because of cash flow problems. The lack of Depreciation 1.366,680 planning resulted in missed sales, as well as periods when Mark EBIT $ 3,040,660 and Todd were unable to draw salaries. To this end, they would Interest 478.240 like Chris to prepare a financial plan for the next year so the Taxable income $ 2,562,420 company can begin to address any outside investment require- Taxes (40%) 1,024,968 ments. The income statement and balance sheet are shown here: Net income $ 1,537,452 Dividends $560,000 Add to retained earnings 977,452 S&S Air, Inc. 2012 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash 441,000 Accounts payable $ 689,000 Accounts receivable 508,400 Notes payable 2,230,000 Inventory 1.237,120 Total current liabilities $ 2.919,000 Total current assets $ 2,186,520 Long-term debt $ 5,320,000 Fixed assets Net plant and equipment $16,122,400 Shareholder equity Common stock $ 350,000 Retained earnings 9,719,920 Total equity $10,069,920 Total assets $18,308,920 Total liabilities and equity $18,308,920 QUESTIONS However, fixed assets must be increased in specific 1. Calculate the internal growth rate and sustainable growth amounts because it is impossible, as a practical matter, to rate for S&S Air. What do these numbers mean? buy part of a new plant or machine. In this case, a com- 2. S&S Air is planning for a growth rate of 12 percent next pany has a "staircase" or "lumpy" fixed cost structure. year. Calculate the EFN for the company assuming the Assume S&S Air is currently producing at company is operating at full capacity. Can the company's 100 percent capacity. As a result, to increase production. sales increase at this growth rate? the company must set up an entirely new line at a cost of $5,000.000. Calculate the new EFN with this assump- 3. Most assets can be increased as a percentage of sales. tion. What does this imply about capacity utilization for For instance, cash can be increased by any amount. the company next year