Planning for Growth at S&S Air 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 ex- perienced some challenging times because of cash flow prob- lems. 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: SAS AIR, INC. 2014 Income Statement Sales $40,259,230 Cost of goods sold Other expenses 29,336,446 5,105,100 1,804,220 $ 4,013,464 630,520 $ 3,382,944 Depreciation EBIT Interest Taxable income Taxes (40%) 1,353,178 Net income $ 2,029,766 Dividends $ 610,000 Add to retained earnings 1,419,766 S&S AIR, INC. 2014 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash 24 456,435 Accounts payable 929,005 Accounts receivable 733,125 Notes payable 1,073,180 $ 2,262,740 2,121,350 $ 3,050,355 $ 5,500,000 Inventory Total current liabilities Total current assets Long-term debt Fixed assets $17,723,430 Shareholder equity Common stock Net plant and equipment Retained earnings Total equity Total liabilities and equity $ 400,000 11,035,815 $11,435,815 $19,986,170 Total assets $19,986,170 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? 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,

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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MINICASE
Planning for Growth at S&S Air
periods when Mark and Todd were unable to draw salaries. To
After Chris completed the ratio analysis for S&S Air (see
Chapter 3), Mark and Todd approached him about planning this end, they would like Chris to prepare a financial plan for
for next year's sales. The company had historically used little
planning for investment needs. As a result, the company ex-
perienced some challenging times because of cash flow prob-
lems. The lack of planning resulted in missed sales, as well as
the next year so the company can begin to address any outside
investment requirements. The income statement and balance
sheet are shown here:
SAS AIR, INC.
2014 Income Statement
Sales
$40,259,230
Cost of goods sold
29,336,446
Other expenses
5,105,100
1,804,220
$ 4,013,464
Depreciation
EBIT
630,520
$ 3,382,944
1,353,178
$ 2,029,766
Interest
Taxable income
Taxes (40%)
Net income
Dividends
$ 610,000
Add to retained earnings
1,419,766
S&S AIR, INC.
2014 Balance Sheet
Assets
Liabilities and Equity
Current assets
Current liabilities
Accounts payable
Notes payable
Cash
456,435
24
929,005
733,125
2,121,350
$ 3,050,355
$ 5,500,000
Accounts receivable
Inventory
Total current assets
1,073,180
$ 2,262,740
Total current liabilities
Long-term debt
Fixed assets
$17,723,430
Shareholder equity
Common stock
Retained earnings
Total equity
Total liabilities and equity
Net plant and equipment
$ 400,000
11,035,815
$11,435,815
$19,986,170
Total assets
$19,986,170
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 $5000,000. Calculate
the new EFN with this assumption. What does this imply
about capacity utilization for the company next year?
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,
Transcribed Image Text:MINICASE Planning for Growth at S&S Air periods when Mark and Todd were unable to draw salaries. To After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning this end, they would like Chris to prepare a financial plan for for next year's sales. The company had historically used little planning for investment needs. As a result, the company ex- perienced some challenging times because of cash flow prob- lems. The lack of planning resulted in missed sales, as well as the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here: SAS AIR, INC. 2014 Income Statement Sales $40,259,230 Cost of goods sold 29,336,446 Other expenses 5,105,100 1,804,220 $ 4,013,464 Depreciation EBIT 630,520 $ 3,382,944 1,353,178 $ 2,029,766 Interest Taxable income Taxes (40%) Net income Dividends $ 610,000 Add to retained earnings 1,419,766 S&S AIR, INC. 2014 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Accounts payable Notes payable Cash 456,435 24 929,005 733,125 2,121,350 $ 3,050,355 $ 5,500,000 Accounts receivable Inventory Total current assets 1,073,180 $ 2,262,740 Total current liabilities Long-term debt Fixed assets $17,723,430 Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity Net plant and equipment $ 400,000 11,035,815 $11,435,815 $19,986,170 Total assets $19,986,170 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 $5000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year? 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,
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