Explore BrainMass

Explore BrainMass

    Internal growth rate / EFN

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Planning for Growth at S&S Air
    After Chris completed the ratio analysis for S&S Air, 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.
    2006 Income Statement
    Sales $ 21,785,300
    Cost of goods sold 15,874,700
    Other expenses 2,762,500
    Depreciation 976,200
    EBIT $ 2,171,900
    Interest 341,600
    Taxable income $ 1,830,300
    Taxes (40%) 732,120
    Net income $ 1,098,180
    Dividends $439,272
    Add to retained earnings 658,908

    S&S Air, Inc.
    2006 Balance Sheet
    Assets Liabilities and Equity
    Current assets Current liabilities
    Cash $ 315,000 Accounts payable $ 635,000
    Accounts receivable 506,000 Notes payable 1,450,000
    Inventory 740,800 Total current liabilities $ 2,085,000

    Total current assets $ 1,561,800
    Long-term debt $ 3,800,000
    Fixed assets
    Net plant and equipment $ 11,516,000 Shareholder equity
    Common stock $ 250,000
    Retained earnings 6,942,800
    Total equity $ 7,192,800
    Total assets $ 13,077,800 Total liabilities and equity $13,077,800

    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, fi xed 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 $4,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?

    © BrainMass Inc. brainmass.com December 15, 2022, 8:18 pm ad1c9bdddf


    Solution Summary

    The solution explains the calculation of internal growth rate and EFN