Question

3. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean? 4. 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 (Hint: beside sales also assume that Costs of goods sold, Other expenses, all company assets and Accounts payable grow with 12%). Can the company's sales increase at this growth rate?

Answer 1

3 ) CALCULATE THE INTERNAL GROWTH RATE FOR S&S AIR ,INC.

FORMULA TO CALCULATE IGR = ROA * RETENTION RATIO

ROA = RETURN ON ASSETS

RETURN ON ASSETS = NET INCOME / TOTAL ASSETS

= $ 1845242 / $ 17379480

= 0.1061 * 100

= 10.61 % ( AROUND 11 %)

b = RETENTION RATIO

= RETAINED EARNINGS / NET INCOME

= $ 1285242 / $ 1845242

= 70 %

INTERNAL GROWTH RATE = ( 11 * 70) / 100

= 770 / 100

= 7.7 %

CALCULATE THE SUSTAINABLE GROWTH RATE :

FORMULA = RETURN ON EQUITY * RETENTION RATIO

RETURN ON EQUITY = NET INCOME / SHARE HOLDER EQUITY

= $ 1845242 /  $ 9556430

= 0.1930

= 19.31 %

RETENTION RATIO = 70%

SUSTAINABLE GROWTH RATE =( 19.31 * 70 ) / 100

= 13.51 %

4) CALCULATE THE EFN ( EXTERNAL FUNDS NEEDED ) FOR S& S AIR INC.

PLANNING FOR GROWTH RATE IN THE NEXT YEAR= 12%

ACTUAL SALES = $ 36599300

=($ 36599300 * 112 ) / 100

= $ 40991216

NET INCOME ALSO INCREASES BY 12 % = ($ 1845242 * 112) / 100

= $ 2066671

ASSETS OF S & S AIR INC . HAS ASSETS OF = $ 17379480

PROJECTED COST ( 12 % ) =( 17379480 * 12 ) / 100

= $ 2085537.6

TOTAL ASSETS = $ 19465017

  

ACCOUNTS PAYABLE GROWS AT 12 % = $ 844550

=( $ 844550 * 112 ) / 100

= $ 945896

EFN ( EXTERNAL FUNDS NEEDED ) =( TOTAL ASSETS - TOTAL CURRENT LIABILITIES - ACCOUNTS PAYABLE - SHARE HOLDER EQUITY )

= $ 19465017 -945896 - 2773050 - 5050000 - 9556430

EFN = $ 1139641