QUESTION B S&S Air, Inc. 2012 Income Statement Planning for Growth at S&S Air After Chris...

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QUESTION B S&S Air, Inc. 2012 Income Statement Planning for Growth at S&S Air After Chris completed the ratio analysis for S&S Air (see Chap- 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 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 require- ments. The income statement and balance sheet are shown here: Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income Dividends $560,000 Add to retained earnings 977,452 S&S Air, Inc. 2012 Balance Sheet Assets Current assets Cash Current liabilities $ 441,000 Accounts payable Accounts receivable Inventory 508,400 1.237.120 Notes payable Liabilities and Equity $ 689,000 2,230,000 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 Total assets Common stock Retained earnings Total equity $18,308,920 Total liabilities and equity $ 350,000 9,719,920 $10,069,920 $18,308,920 $30,499,420 22,224,580 3,867,500 1,366,680 $ 3,040,660 478,240 $ 2,562,420 1,024,968 $ 1,537,452 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 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 $5,000,000. Calculate the new EFN with this assump- tion. What does this imply about capacity utilization for the company next year? QUESTION B S&S Air, Inc. 2012 Income Statement Planning for Growth at S&S Air After Chris completed the ratio analysis for S&S Air (see Chap- 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 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 require- ments. The income statement and balance sheet are shown here: Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income Dividends $560,000 Add to retained earnings 977,452 S&S Air, Inc. 2012 Balance Sheet Assets Current assets Cash Current liabilities $ 441,000 Accounts payable Accounts receivable Inventory 508,400 1.237.120 Notes payable Liabilities and Equity $ 689,000 2,230,000 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 Total assets Common stock Retained earnings Total equity $18,308,920 Total liabilities and equity $ 350,000 9,719,920 $10,069,920 $18,308,920 $30,499,420 22,224,580 3,867,500 1,366,680 $ 3,040,660 478,240 $ 2,562,420 1,024,968 $ 1,537,452 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 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 $5,000,000. Calculate the new EFN with this assump- tion. What does this imply about capacity utilization for the company next year?