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PLEASE SHOW WORK

After Chris completed the ratio alysis out planning

opproached him abS&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 invesment 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 (Income Statment)

Sales:.............................. 30,499,420

Cost of Goods Sold: ............22,224,580

Other Expenses: ..................3,867,500

Depreciation: ...................... 1,366,680

EBIT: ...................................3,040,660

Interest: ..............................478,240

Taxable Income:.................. 2,562,420

Taxes (40 %) ......................1,024,968

Net Income" ............................ 1,537,452

Dividends: 560,000

Add to retained income: 977,452

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BALANCE SHEET

Current Assets

Cash:..441,000

Account Receivable: 508,400

Inventory:...1,237,120

Total Current Assets: 2,186,520

Fixed Assets:

Net Plant & Eqpt:16,122,400

Total Assets: 18,308,920

LIABILITIES:

current liabilities: Accounts Payable: 689,000

Notes Payable: 2,230,000

total current assets: 2,919,000

Long Term Debt: 5,320,000

Shareholder Equity Common Stock: 350,000

Retained Earning: 9,719,920

Total Equity: 10,069,920

Total Liabilities: 18,308,920

QUESTION 1: Calculate the Internal

Growth Rate and sustainable Growth Rate for S&S Air.

What do these numbers mean?

QUESTION 2: S&S Air is

planning for a growth rate of 12 percent next year. Calculate the EFN

for company assuming the company is operating at full capacity.

Can the company sales increase at this growth rate?

QUESTION 3: Most assets can be increased as

a percentange of sales. For instanace 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 % capacity. As a result to

increase production the company must set up an entirely new lone at a cost of $

5,000,000. Calculate the bew EFN with this assumption. What

does this imply about capacity utilization for the company next year?

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