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Internal growth rate / EFN

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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?

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The solution explains the calculation of internal growth rate and EFN

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Internal Growth Rate and Sustainable Growth Rate for S&S Air

I need some help in this case study:
Chris Guthrie was recently hired by S&S Air Ltd, to assist the company with its financial planning and to evaluate the company's performance. Chris graduated from university five years ago with a finance degree. He has been employed in the finance department of an ASX 200 company since then. S&S Air was founded 10 years ago by friends Mark Sexton and Todd tory. The company has manufactured and sold light aeroplanes over this period, and the company's products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own aeroplanes. The company has two models; the Birdie, which sells for $53 000, and the Eagle, which sells for $78 000.
Although the company manufactures aircraft, its operations are different from commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated parts, the company can complete the manufacture of an airplane in only five weeks. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial airplane may take one and one-half to two years to manufacture once the order is placed.

Below are the questions I'm being asked to respond to, but I have no idea how to go about answering them.

Calculate the 2013 internal growth rate and sustainable growth rate for S&S Air. What do these numbers tell you about S&S Air and its ability to grow? Explain.

Prepare a pro forma income statement and pro forma balance sheet for S&S Air for 2014 assuming that the company is operating at full capacity and is planning for a growth rate of 13%. The controller has indicated that he would like the statements prepared with interest expense held constant (i.e. not tied to sales growth) but with depreciation growing with growth in fixed assets. Based on these pro forma statements, calculate the EFN for the company. Is it possible for S&S sales to grow at 13%? Why or why not? Explain.

Prepare a second pro forma income statement and pro forma balance sheet for S&S Air for 2014, again assuming the company is operating at full capacity and is planning for a growth rate of 13%. However, in this case, assume the company has discovered that in order to increase production they must set up an entirely new line, generating a fixed asset expenditure of $5,000,000. Based on these pro forma statements, again calculate the EFN for the company. Why is it different? What effect, if any, will setting up the new line have on capacity utilization for 2014? Explain.

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