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    Ventura, Mary Mickaella R Chapter 4 - Minicase

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    Mary Ventura
    This implies that S&S Air will not be able to operate at 100% capacity next year with the 12% sales growth rate. The additional fixed asset purchase increases the break-even point, and the company's EFN is now positive rather than negative, indicating it has some cushion for growth but not enough for a 12% increase which was the original plan. The company will need to consider operating at less than full capacity next year if it wants to achieve the 12% sales growth target.

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    Ventura, Mary Mickaella R Chapter 4 - Minicase

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    Mary Ventura
    1K views5 pages
    This implies that S&S Air will not be able to operate at 100% capacity next year with the 12% sales growth rate. The additional fixed asset purchase increases the break-even point, and the company's EFN is now positive rather than negative, indicating it has some cushion for growth but not enough for a 12% increase which was the original plan. The company will need to consider operating at less than full capacity next year if it wants to achieve the 12% sales growth target.

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    This implies that S&S Air will not be able to operate at 100% capacity next year with the 12% sales growth rate. The additional fixed asset purchase increases the break-even point, and the company's EFN is now positive rather than negative, indicating it has some cushion for growth but not enough for a 12% increase which was the original plan. The company will need to consider operating at less than full capacity next year if it wants to achieve the 12% sales growth target.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views5 pages

    Ventura, Mary Mickaella R Chapter 4 - Minicase

    Uploaded by

    Mary Ventura
    This implies that S&S Air will not be able to operate at 100% capacity next year with the 12% sales growth rate. The additional fixed asset purchase increases the break-even point, and the company's EFN is now positive rather than negative, indicating it has some cushion for growth but not enough for a 12% increase which was the original plan. The company will need to consider operating at less than full capacity next year if it wants to achieve the 12% sales growth target.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    The document discusses S&S Air's historical lack of planning which led to cash flow problems and missed sales opportunities. It now wants to create a financial plan to address investment needs.

    If the company needs to purchase an entirely new production line costing $5 million to increase capacity, it implies the company will be operating at full capacity next year if it grows at 12%.

    The internal growth rate is 5.64% and sustainable growth rate is 10.75%. The internal growth rate is the maximum rate the company can grow using internally generated funds, while the sustainable growth rate is the maximum rate using both internal and external funds.

    Mary Mickaella R.

    Ventura

    BSA 3-A
    Chapter 4 Minicase

    1. 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 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:
    QUESTIONS:

    1. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these
    numbers mean?

    Solution:
    ROA = NI / TA
    ROA = $1,537,452 / $18,309,920
    ROA = .0840 or 8.40%

    b = Addition to RE / NI
    b=$977,452 / $1,537,452
    b = 0.64

    Internal growth rate = (ROA × b) / [1 – (ROA × b)]


    Internal growth rate = [0.0840(.64)] / [1 – 0.0840(.64)]
    Internal growth rate = .0564 or 5.64%

    ROE = NI / TE
    ROE = $1,537,452 / $10,069,920
    ROE = .1527 or 15.27%

    Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]


    Sustainable growth rate = [0.1527(.64)] / [1 – 0.1527(.64)]
    Sustainable growth rate = .1075 or 10.75%

    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?

    Solution:
    12% growth rate draft of financial statement:
    Sales $ 34,159,350
    COGS 24,891,530
    Other expenses 4,331,600
    Depreciation 1,366,680
    EBIT $ 3,569,541
    Interest 478,240
    Taxable income $ 3,091,301
    Taxes (40%) 1,236,520
    Net income $ 1,854,780

    Dividends $ 675,583
    Add to RE 1,179,197
    Provided Balance Sheet:

    Balance sheet

    Assets Liabilities & Equity

    Current Assets Current Liabilities

    Cash $493,920 Accounts Payable $995,680


    Accounts rec. 793,408 Notes Payable 2,030,000
    Inventory 1,161,574 Total CL $3,025,680
    Total CA $ 2,448,902

    Long-term debt $5,320,000

    Shareholder Equity
    Common stock
    $ 350,000
    Fixed assets Retained earnings 10,899,117
    Net PP&E $ 18,057,088 Total Equity $ 11,249,117
    Total Assets $ 20,505,990 Total L&E $ 19,594,787

    Assume:
    EFN = Total assets – Total liabilities and equity
    EFN = $20,505,990 – 19,594,797
    EFN = $911,193

    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 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?

    Solution:
    Depreciation percentage = $1,366,680 / $16,122,400
    Depreciation percentage = .0848 or 8.48%

    Fixed assets with the $5 million purchase will be:


    New fixed assets = $16,122,400 + 5,000,000 =$21,122,400

    Pro forma depreciation = .0848($21,122,400)


    Pro forma depreciation = $1,790,525

    Income statement provided:

    Sales $ 34,159,350
    COGS 24,891,530
    Other expenses 4,331,600
    Depreciation 1,790,525
    EBIT $ 3,145,696
    Interest 478,240
    Taxable income $ 2,667,456
    Taxes (40%) 1,066,982
    Net income $ 1,600,473

    Dividends $ 582,955
    Add to RE 1,017,519
    Note: The pro forma balance sheet will remain the same except for the fixed asset and equity
    accounts. The fixed asset account will increase by $5 million, rather than the growth rate of
    sales.

    Provided Balance Sheet:

    Balance sheet

    Assets Liabilities & Equity

    Current Assets Current Liabilities


    Cash $493,920 Accounts Payable $995,680
    Accounts rec. 793,408 Notes Payable 2,030,000
    Inventory 1,161,574 Total CL $3,025,680
    Total CA $2,448,902

    Long-term debt $5,320,000


    Shareholder Equity
    Commonstock
    $350,000
    Fixed assets Retained earnings 10,737,439
    Net PP&E $ 21,122,400 Total Equity $ 11,087,439
    Total Assets $ 23,571,302 Total L&E $ 19,433,119

    Assume:
    EFN = Total assets – Total liabilities and equity
    EFN = $23,581,302 – 19,433,119
    EFN = $4,138,184

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