Based on the content covered in Week 4 and Chapters 3 and 4 of the Ross, et al. (2022) text, students learned about financial statement analysis and long-term financial planning and growth. Students should address the following:

Review “Mini Case: Planning for Growth at S&S Air” in your textbook on page 129, also found at the end of Chapter 4 in your textbook. Then, answer the following questions:

1. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean? How do you know?
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? Explain your reasoning.
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 at 100% 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?
4. Consider how long term planning and growth is affected by location in the world. Discuss how you would advise S&S Air about planning and growth in your own country and expansion into other countries?

Paper should be 4-6 pages and include all calculations referenced in the assignment questions.

ESSAY 2

Capital Budgeting Assignment – CLO 4, CLO 5

Based on the content covered in Week 6 and Chapters 8, 9, and 10 of the Ross, et al. (2022) text, students learned about stock valuation, net present value concept, and capital investment decisions. Students should address the following:

Study the following capital budgeting project and then provide explanations for the questions outlined below:

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers (stringed instruments). The market for zithers is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.3 million on an after-tax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows:

The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ believes that fixed costs for the project will be $415,000 per year, and variable costs are 15% of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Networking capital of $125,000 will be required immediately. PUTZ has a 38% tax rate, and the required rate of return on the project is 13%.

Now provide detailed explanations for the following:

• Explain how you determine the initial cash flows.
• Discuss the notion of sunk costs and identify the sunk cost in this project.
• Verify how you determine the annual operating cash flows.
• Explain how you determine the terminal cash flows at the end of the project’s life.
• Calculate the NPV and IRR of the project and decide if the project is acceptable.
• If the company that is implementing this project is a publicly traded company, explain and justify how this project will impact the market price of the company’s stock.

Provide detailed and precise explanations and definitions. Comment on your findings and provide references for content when necessary. Explain everything in your own words.

Paper should be 3-5 pages including any calculations for questions above.

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