CH4 Minicase

Name: Mervin R.
Coquilla
Year and Section: BSAIS-3B
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 has historically used little
planning for investments 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.

2008 Income Statement
Sales $30,499,420
Cost of goods sold 22,224,580
Other expenses 3,867,500
Depreciation 1,366,680
EBIT $ 3,040,660
Interest 478,240
Taxable income $ 2,562,420
Taxes (40%) 1,024,968
Net income $ 1,537,452
Dividends $560,000
Add to retained earnings 977,452
S&S Air, Inc.

2006 Balance Sheet
Assets Liabilities and Equity
Current assets Current liabilities
Cash $ 441,000 Accounts payable $ 889,000
Accounts receivable 708,400 Notes payable 2,030,000
Inventory 1,037,120 Total current liabilities $2,919,000
Total current assets $2,186,520 Long-term debt $5,320,000
Fixed assets
Net plant and equipment $16,122,400 Shareholder equity
Common stock $ 350,000
Retained earnings 9,719,920
Total equity $10,069,920
Total assets $18,308,920 Total liabilities and equity $18,308,920
1. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do
these numbers mean?
Return on asset(ROA)=Net =$1,537,452/$19,309,920

income/Total assets = .0840 or 8.40%
Plowback ratio(b)=Addition to =$977,452/$1,537,452
retained earnings / Net income = 0.64
Internal Growth Rate = (ROA)xb)] = (0.0840(.64)/[1-(0.0840(.64)]
= 0.0564 or 5.64%
Sustainable Growth Rate = [0.1527(.64)]/[1-0.1527(.64)]
(ROE x b)1-ROE bill = .1075 or 10.75%
2. S&S Air is planning for a growth rate of 12% 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?
S&S Air, Inc.

Pro Forma Income Statement
Sales $34,159,350
EBIT $ 3,569,541
Interest 478,240
Taxes (40%) 1,236,520
Dividends $675,583
Addition to retrained earnings 1,179,197
S&S Air, Inc.

Pro Forma Balance Sheet
Assets:
Current Assets
Cash (441,000+112%) $493,920.00
Accounts receivable (708,400+112%) 793,408.00
Inventory (1,307,120 +112%) 1,161,574.40
Total Current Assets $2,448,902.40
Fixed Assets
Net Property Plant and Equipment $18,057,088
Total Assets: $20,505,990.40
Liabilities:
Current Liabilities
Accounts Payable $995,680
Notes Payable 2,030,000
Total Current Liabilities $3,025,680
Long-term Debt $5,320,000
Total Liabilities $8,345,680
Shareholders Equity
Common Stock $350,000
Retained Earnings 10,889,117
Total Shareholders Equity $11,249,117
Total Liabilities and Shareholders Equity $19,594,797
External Financing Needed (EFN) = Total Assets -Total Liabilities and Shareholder’s Equity
=$20,505,990.40 - $19,594,797.00
=911,193.40
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 a 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?
Based on my computations it shows that the rate of growth of fixed asset and sales
are quietly behind from each the fact that the fixed asset have grown more rapidly
than sales resulting to the decrease in capacity utilization for the next operating cycle.
Depreciation Percentage:
=(Depreciation 2006)/(Fixed Asset 2006)
=$1,366,680/$16,122,400
=0.848 or 8.48%
Pro Forma Depreciation

=(Depreciation percentage)(New Fixed Asset)
=(0.0848)($21,122,400)
=$1,790,525
S&S Air, Inc.

Pro Forma Income Statement
Sales $34,159,350
EBIT $ 3,145,696
Interest 478,240
Taxes (40%) 1,066,982
Dividends $ 582,955
Addition to Retained Earnings 1,017,519
S&S Air, Inc.

Pro Forma Balance Sheet
Assets:
Current Assets
Cash (441,000+112%) $493,920.00
Accounts receivable (708,400+112%) 793,408.00
Inventory (1,307,120+112%) 1,161,574.40
Total Current Assets $2,448,902.40
Fixed Assets
Net Property, Plant, and Equipment $21,122,400
Total Assets: $23,571,302.40
Liabilities:
Current Liabilities
Accounts Payable $995,680
Notes Payable 2,030,000
Total Current Liabilities $3,025,680
Long-term Debt $5,320,000
Total Liabilities: $8,345,680
Shareholder’s Equity
Common Stock $350,000
Retained Earnings 10,737,439
Total Shareholders Equity $11,087,439
Total Liabilities and Shareholder’s Equity $19,433,119
External Financing Needed (EFN)

=Total Assets -Total Liabilities and Shareholder’s Equity
=$23,581,302.40 - $19,433,119.00
=$4,138,184

CH4 Minicase

Uploaded by

Copyright:

Available Formats

CH4 Minicase

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH4 Minicase

Uploaded by

Copyright:

Available Formats

Name: Mervin R.

S&S Air, Inc.

S&S Air, Inc.

Return on asset(ROA)=Net =$1,537,452/$19,309,920

S&S Air, Inc.

S&S Air, Inc.

Pro Forma Depreciation

S&S Air, Inc.

S&S Air, Inc.

External Financing Needed (EFN)

You might also like