S&S AIR, INC. GENERAL INFORMATION:
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.
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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