Lexie Quarantiello Case 4 S&S Air 1.

Calculate the internal growth rate and the sustainable growth rate for S&S Air. What do these numbers mean? Internal Growth Rate :
ROA * b 1-(ROA*b) = 0.05 0.95 = 6%

This means S&S Air can growth 6% without any external financing. Sustainable Growth Rate:

ROE *b 1-(ROE*b)

= 0.0971 = 11% 0.9029

This means S&S means can growth 11% without any external equity financing, while maintaining a constant debt/equity ratio. 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 companys sales increase at the growth rate? The external financing needed (EFN) would be $2,090,390. For the company to grow at this rate they would need to find external equity financing. This is so because the sustainable growth rate, rate of possible growth without any external equity financing, is 11%. Growing at this rate of 12% is risky because it forces the company to increase its financial leverage. 3. Assume S&S Air is currently producing at 100% percent capacity. As a result, to increase production, the company must set up a entirely new line at a cost of $5,000,000. Calculated the new EFN with this assumption. What does this imply about capacity utilization for the company next year? The new amount of external financing needed (EFN) would be $5,155,702. For next year capacity utilization needed exceeds capacity. Therefore a new line of equipment is needed. It is not wise for companies to operate at 100% capacity because if there is unexpected growth in sales they do not have the ability to produce for the unexpected growth. Typically companies should / do operate at

around 85% capacity so they are able to have wiggle room incase something unexpected happens.