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The sustainable growth rate of the company

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Temporary and permanent personnel provider for accounting, finance and IT.
Financial data see attachment.
Questions:
a) Comparing the company's sustainable growth rate with its actual growth rate in sales, what growth problems did the company face over the period?
b) The first dividend was paid in 2004. Assess the company's decision to pay dividends.
c) Considering economic conditions 2000 - 2004, what was a likely cause of the growths problems?

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Dear Student,

The sustainable growth rate of the company is higher than the actual growth rate for years 2000,2001 and 2002. However the reverse is the case for years 2003 and 2004. If we look at the profit margin for years 2000,2001,2002, we see that the margins are reducing and even in 2003, it is no better. There is a turnaround in the profit margin in 2004 which is a healthy sign. Generally if the profit margins are low, it means either the sales units are less or the cost of operations are so high or an effect of both. If we look ...

Solution Summary

The sustainable growth rate of the company is evaluated.

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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.

QUESTIONS:
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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