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

Question:

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:

S&S AIR, INC. 2014 Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest

Current assets Cash Assets Accounts receivable Inventory Total current assets Fixed assets Net plant and

QUESTIONS
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 amountsbecause it is impossible, as a practical matter, to buy partof a new plant or machine. In this case, a company has a"staircase" or "lumpy" fixed cost structure. Assume S&SAir is currently producing at 100 percent capacity. As aresult, to increase production, the company must set upan entirely new line at a cost of $5,000,000. Calculatethe new EFN with this assumption. What does this implyabout capacity utilization for the company next year?

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Fundamentals of Corporate Finance

ISBN: 978-0077861704

11th edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

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