Tire City Preparation Questions for Case

Here are some things to think about as youre reading and analyzing the case. You
may find these useful in preparing for our in-class discussions.

1. Evaluate Tire Citys financial health. How well is the company performing?
2. Based on Mr. Martins prediction for 1996 sales of $28,206,000, and for 1997 sales of
$33,847,000 and relying on the other assumptions provided in the Tire City case, prepare
complete pro forma forecasts of TCIs 1996 and 1997 income statements and year-end
balance sheets. As a preliminary assumption, assume any new financing required will be in
the form of bank debt. Assume all debt (i.e., existing debt and any new bank debt) bears
interest at the same rate of 10%.
3. Using your set of pro forma forecasts, assess the future financial health of Tire City as of
the end of 1997. Will Tire City be in a stronger or weaker financial condition two years from
now?
4. What would be the impact on TCIs external funding needs as of the end of 1996 if:
a. Inventory were not reduced by the end of 1996?
b. Accrued expenses were to grow less than expected in 1996?
5. What would be the impact on TCIs external funding needs as of the end of 1997 if:
a. TCI depreciated more than 5% of the warehouses total cost in 1997?
b. TCI experienced higher price inflation in its revenues and operating costs (but not in the
cost of its warehouse expansion) than was originally anticipated in 1996 and 1997?
c. Days receivables were reduced to 45 days, or days payables were increased to 45 days?
6. Suppose the proposed terms of the bank credit included a covenant (a contractual
obligation that binds a borrower to specific actions or outcomes as a condition for extending
a loan) that read as follows: The company must maintain net working capital (defined for
purposes of this loan as accounts receivable plus inventories minus accounts payable) of at
least $4 million. For purposes of this covenant, net working capital will be measured at
the end of each fiscal year. Is TCI likely to be able to satisfy this covenant in both 1996 and
1997?
7. As a lender, would you be willing to loan TCI the funds needed to expand its warehouse
facilities and finance its growth? Why or why not?