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
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?
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:
Internal Growth Rate
"An internal growth rate (IGR) is the highest level of growth achievable for a business without obtaining outside financing, and a firm's maximum internal growth rate is the level of business operations that can continue to fund and grow the...
S&S AIR, INC. 2018 Income Statement Sales $46,298,115 Cost of goods sold 34,536,913 Other expenses 5,870,865 Depreciation 2,074,853 $ 3,815,484 EBIT Interest 725,098 $ 3,090,386 Taxable income Taxes (21%) 772,597 Net income $ 2,317,789 $ 705,000 Dividends Add to retained earnings 1,612,789 S&S AIR, INC. 2018 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities $ 1,068,356 $ 524,963 Cash Accounts payable Accounts receivable 843,094 Notes payable 2,439,553 $ 3,507,909 $ 6,300,000 1,235,161 $ 2,603,218 Total current liabilities Inventory Total current assets Long-term debt Fixed assets $ 460,000 Net plant and equipment $20,381,945 Shareholder equity Common stock Retained earnings 12,717,254 Total equity $13,177,254 Total assets $22,985,163 Total liabilities and equity $22,985,163
This problem has been solved!
- Tutor Answer
1 To calculate the internal growth rate we first need to find the ROA and the retention ratio so ROA NI TA ROA 2 317 789 22 985 163 ROA 1008 or 10 08 b Addition to RE NI b 1 612 789 2 317 789 b 70 Now …View the full answer
Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.
Students also viewed these Business questions