1. S&S Air, Inc.

2. Case questions What problem does S&S Air, Inc. face in this case?
What does an extended DuPont analysis (ROE) indicate about the performance of the company?
What do the rates of growth (IGR and SGR) indicate about the company’s performance?
4. What do the financial planning results show about the external financing needed (EFN)?

3. What is the problem? The company wants to grow - -
They need to compare their performance to that of other companies in the industry to identify their strengths and weaknesses.
They need to develop alternative financial plans to evaluate how best to finance the anticipated growth.

4. Income Statement 2008 (not 2009)

5. Balance Sheet, 2008 (not 2006)

6. Industry financial data, 2008

7. Extended DuPont analysis
ROE = PM * ATO * EM
= (1,537,452 / 30,499,420) * (30,499,420 / 18,308,920) *
(18,308,920 / 10,069,920)
= * * 1.818 =
What are the strengths of S&S Air relative to the aircraft industry?
Ratio
S&S Air
25%
50%
75% PM
.0504
.0405
.0698
.0987
ATO
1.666
.68
.85
1.38
ROA
0.084
0.061
.105
.132 EM
1.818
1.79
2.08
2.56
ROE
0.1527
.0993
.1654
.2615

8. SGR = (b*ROE) / [1-(b*ROE)]
Rates of growth
Internal growth rate - -
IGR = (b*ROA) / [1 – (b*ROA)]
ROA = EAT / A = 1,537,452 / 18,308,920 = 0.084
b = Add to R.E. / EAT = 977,452 / 1,537,452 = .6358
IGR = (.6358 * .084) / [1 – (.6358 * .084)] = .0564
Sustainable growth rate - -
SGR = (b*ROE) / [1-(b*ROE)]
ROE = ROA * EM = EAT / E = 1,537,452 / 10,069,920 = .1527
SGR = (.6358 * .1527) / [1 – (.6358 * .1527)] = .1075

9. EFN
Graph of EFN - - the external financing required for 12% sales growth assuming full capacity utilization
EFN = Chge. Assets – Chge. Liab. – Chge. Ret. Earn.
Chge. Assets = .12 * 18,308,920 = 2,197,070
Chge. Liab. = .12 * 889,000 = 106,680
Chge. Ret. Earn. - -
EBIT(1) = (30,499,420 – 22,224,580 – 3,867,500)* 1.12 – 1,366,680
= 3,569,541
EBT(1) = EBIT(1) – I = 3,569,541 – 478,240 = 3,091,301
Chge. Ret. Earn. = EBT* (1- t) * (b)
= 3,091,301 * (1-.40) * = 1,179,270
EFN = 2,197,070 – 106,680 – 1,179,270 = 911,120
Let’s look at the pro-forma statements to verify our EFN result.

10. Pro forma Income Statement (12 percent growth rate)
Income 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
$ ,583
Add to RE
1,179,197

11. Pro-forma BaIance Sheet (12 percent growth rate)
Balance sheet
Assets
Liabilities & Equity
Current Assets
Current Liabilities
Cash
$ ,920
Accounts Payable
$ ,680
Accounts rec.
793,408
Notes Payable
2,030,000
Inventory
1,161,574
Total CL
$ ,025,680
Total CA
$ 2,448,902
Long-term debt
$ ,320,000
Shareholder Equity
Common stock
$ ,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
So, the EFN is:
EFN = Total assets – Total liabilities and equity
EFN = $20,505,990 – 19,594,797
EFN = $911,193 (a small difference due to rounding error)

12. What happens to EFN when assets are purchased in increments of $5 million? (Handout)
Because fixed assets increase more rapidly, the depreciation expense will increase at a rate that is faster than sales growth - -
=> Sales, profits and retained earnings contribute proportionately less to the total financing required (Ret. Earn. declines), and
=> Liabilities (spontaneous liability growth) will contribute less to the total financing required.
=> So, EFN has to increase.