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Tire City

Harvard Business School Case #297-091


Case Software #XLS092

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Assumptions
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Deprecia
And that forecasted percentage is derived by finding the item as a % of sales for yr 1995. For ex-COGS in 1995 is 58% of sales in 1995.
2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative a
So interest on the pulg for 1996 will be charged in the year 1997
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical inte
4. We are assuming income tax rate of year 1995 for the future years
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest

Exhibit 1 Financial Statements for Tire City, Inc.

In $ thousands
For years ending 12/31 1993 1994 1995

INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 20%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190

Dividends $155 $200 $240 20%

BALANCE SHEET

Assets
Cash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 7%
Total current liabilities 2,312 2,882 3,218

Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983

External financing need financed by


Bank debt - (Line of credit)
sh, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
OGS in 1995 is 58% of sales in 1995. And this 58% is assumed to be the forecasting rate for future years for COGS
he management is conservative and will take extra liability as late as it can.

e actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values

will be outstanding interest

In $ thousands
1996 1997

growth in sales 28206 33847.2 Int expense $62.50


% of sales 16334.4 19,601 O/s Int Exp $42.29
11871.6 14245.92 Net int Exp $104.79

% of sales 8965.2 10,758


213 333
$75.00 $104.79 We are providing interest @ 10% on long term debt of 625000$ . Int is n
2618.4 3049.893 also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it wa
% of sales 1145.16 1333.88 borrowed at the end of 1995
1473.24 1,716

as a % of PAT 297.12 346.09

% of sales 846.18 1015.416


% of sales 4382.4 5,259
% of sales 1625 3,154
6853.58 9,428

6,163 6,563
1,941 2,274
4,222 4,289

11,075.58 13,716.90

constant - given $125 $125


$422.87 $1,034.65 This is the plug
% of sales 1728 2073.6
$42.29 int @ 10% on the 1995 Ext Fin Need of 422870$ will be
% of sales 1983.6 2380.32 outstanding as it will be repaid in instalments from year 1998
$4,259.47 5,655.85

decreases by $125 625 500

remains constant 1,135 1,135


5,056.11 6,426.04
6,191.11 7,561.04

11,075.58 13,716.90

financing need financed by


nk debt - (Line of credit) 422.87 611.78
fractional values

ng term debt of 625000$ . Int is n


ng Need(Plug) of 422870$ as it was

d of 422870$ will be
stalments from year 1998
For years ending 12/31 1993 1994 1995 1996 1997
INCOME STATEMENT
Net sales 16230 20355 23505 28206 33847.2
Cost of sales 9430 11898 13612 16334.4 19601.28
Gross profit 6800 8457 9893 11871.6 14245.92
Selling, general, and
administrative expenses 5195 6352 7471 8965.2 10758.24
Depreciation 160 180 213 213 333
Net interest expense
119 106 94 75 104.7867
Pre-tax income 1326 1819 2115 2618.4 3049.893
Income taxes
546 822 925 1145.163 1333.878 0.437352
Net income 780 997 1190 1473.237 1716.016
Dividends
155 200 240 297.1234 346.0872

BALANCE SHEET
Assets
Cash 508 609 706 846.18 1015.416
Accounts receivable
2545 3095 3652 4382.4 5258.88
Inventories 1630 1838 2190 1625 3153.6
Total current assets 4683 5542 6548 6853.58 9427.896

Gross plant & equipment 3232 3795 4163 6163 6563


Accumulated depreciation 1335 1515 1728 1941 2274
Net plant & equipment 1897 2280 2435 4222 4289
Total assets
6580 7822 8983 11075.58 13716.9

LIABILITIES
Current maturities of
long-term debt 125 125 125 125 125
Bank Debt - plug 422.8665 1034.647
Accounts payable 1042 1325 1440 1728 2073.6
Accrued interest Expense 42.28665
Accrued expenses 1145 1432 1653 1983.6 2380.32
Total current liabilities 2312 2882 3218 4259.467 5655.854
Long-term debt 1000 875 750 625 500
Common stock 1135 1135 1135 1135 1135
Retained earnings 2133 2930 3880 5056.113 6426.042
Total shareholders’ equity 3268 4065 5015 6191.113 7561.042
Total liabilities 6580 7822 8983 11075.58 13716.9
Profitability Ratios
1993 1994 1995 1996 1997
Gross Profit Margin 41.90% 41.55% 42.09% 42.09% 42.09%
Profit Margin 4.81% 4.90% 5.06% 5.22% 5.07%
ROE 23.87% 24.53% 23.73% 23.80% 22.70%
ROIC 19.84% 21.39% 21.56% 20.93% 19.51%

Activity Ratio
1993 1994 1995 1996 1997
ROA 2.466565 2.602276 2.616609 2.546684 2.467555
Accounts Receivables
6.37721 6.576737 6.436199 6.436199 6.436199
Turn Over Ratio
Collection Period 57.23506 55.49865 56.71049 56.71049 56.71049
Inventory Turn Over
5.785276 6.473341 6.215525 10.05194 6.215525
Ratio
NFA turn over 8.555614 8.927632 9.652977 6.68072 7.89163

Solvency Ratio
1993 1994 1995 1996 1997
Debt to Equity Ratio 0.234302 0.177126 0.130095 0.144753 0.168722
Interest Coverage Ratio 12.14286 18.16038 23.5 35.912 30.10574
Debt Service coverage
4.235501 5.865972 6.986883 9.063686 9.6488
Ratio

Liquidity Ratio
1993 1994 1995 1996 1997
Current Ratio 2.025519 1.92297 2.034804 1.786368 2.040137
Quick Ratio 1.320502 1.285219 1.354257 1.362816 1.357718
Net Working Capital 2371 2660 3330 2171.247 2737.395

Q1)
Profit Margin
ROC These are the critical ratios which gives insights into the financial
Hence, the financial health of the company is good.
Collection period
Inventory Turn Over Ratio
Debt -Equity Ratio
Quick Ratio
Current Ratio

Q3)
Profit Margin
ROC
Collection period
Inventory Turn Over Ratio
Debt -Equity Ratio
Quick Ratio
Current Ratio

Q8)

TCI’s future financial health looks fairly stable over the


years analyzed and forecasted. With the forecast from
the management, there is an increase in sales and
stable ratios. The increase in sales each year does not
show an increase in expenses at the same level. This
position allows the net income to grow. The increase in
net income shows that TCI is in a good position to
obtain the loan. Therefore, it is recommended that the
bank loan TCI the funds.
Increase/Decrease Increase/Decrease
from 93 to 95 from 95 to 97
Improvement Improvement
Improvement Improvement
No change Deterioration
Improvement Deterioration

Increase/Decrease Increase/Decrease
from 93 to 95 from 95 to 97
Improvement Deterioration
Improvement No Change
No change No change
Improvement No Change
Improvement Deterioration

`
Increase/Decrease Increase/Decrease
from 93 to 95 from 95 to 97
Deterioration Improvement
Improvement Improvement
Improvement Improvement

Increase/Decrease Increase/Decrease
from 93 to 95 from 95 to 97
Improvement Improvement
Improvement Improvement
Improvement Deterioration

gives insights into the financial health of the company and they seem to be stable over the years.
company is good.
Question 2
Based on Mr Martin's Sales predictions for 1996 sales of 28206000$ and for 1997 sales of 33847000 and relying on other ass
balance sheet and cash flow statement for 1996 and 1997. As a prelimnary assumption assume that any new financing need w

Income statement
Balance sheet
Cash flow statement
Assumptions
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation ,
And that forecasted percentage is derived by finding the item as a % of sales for yr 1995. For ex-COGS in 1995 is 58% of sales in 1995. And
2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and w
So interest on the pulg for 1996 will be charged in the year 1997
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest r
4. We are assuming income tax rate of year 1995 for the future years
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest

Exhibit 1 Financial Statements for Tire City, Inc.


INCOME STATEMENT
In $ thousands
For years ending 12/31 1993 1994 1995

INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 20%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190

Dividends $155 $200 $240 20%

BALANCE SHEET
In $ thousands
For years ending 12/31 1993 1994 1995
Assets
Cash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 7%
Total current liabilities 2,312 2,882 3,218

Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983

External financing need financed by


Bank debt - (Line of credit)

CASH FLOW STATEMENT

in/out flow 1996 1997

Operating activities
Net profit after dividend 1176.11 1369.93
Add: Non cash/adjustments
Depreciation 213 333
Interest expense (disclosed seperately) $75.00 $104.79
Increase/decrease in working capital
Increase in Accounts receivable Outflow -730 -876
Decrease in inventory Inflow 565 -1,529 outflow
Increase in payables inflow 288 346
Increase in accrued expenses inflow 331 397
a 1917.31 144.96
Investing activities
Purchase of fixed assets outflow -2,000 -400
b -2,000 -400
Financing activities
Proceeds from borrowings inflow $422.87 $611.78
Repayment of borrowings outflow -$125 -$125
Interest paid outflow -$75.00 -$62.50
c 222.87 424.28

Total a +b+c d 140.18 169.24 Cash flow during the year


Cash at the beginning of the period e $706 846.18
Total cash balance - End of the year 846.18 1015.416
As per financials 846.18 1015.42
Difference 0.00 0.00
f 33847000 and relying on other assumptions provided in the case, prepare a pro forma income statement
ssume that any new financing need will be required in the form of bank debt

h, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
OGS in 1995 is 58% of sales in 1995. And this 58% is assumed to be the forecasting rate for future years for COGS
he management is conservative and will take extra liability as late as it can.

actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values

will be outstanding interest

ME STATEMENT
In $ thousands
1996 1997

growth in sales 28206 33847.2 Int expense $62.50


% of sales 16334.4 19,601 O/s Int Exp $42.29
11871.6 14245.92 Net int Exp $104.79

% of sales 8965.2 10,758


213 333
$75.00 $104.79 We are providing interest @ 10% on long term debt of 625000$ . Int is n
2618.4 3049.893 also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was
% of sales 1145.16 1333.88 borrowed at the end of 1995
1473.24 1,716

as a % of PAT 297.12 346.09

CE SHEET
In $ thousands
1996 1997

% of sales 846.18 1015.416


% of sales 4382.4 5,259
% of sales 1625 3,154
6853.58 9,428

6,163 6,563
1,941 2,274
4,222 4,289

11,075.58 13,716.90

constant - given $125 $125


$422.87 $1,034.65
% of sales 1728 2073.6
$42.29 int @ 10% on the 1995 Ext Fin Need of 422870$ will be
% of sales 1983.6 2380.32 outstanding as it will be repaid in instalments from year 1998
$4,259.47 5,655.85

decreases by $125 625 500

remains constant 1,135 1,135


5,056.11 6,426.04
6,191.11 7,561.04

11,075.58 13,716.90

financing need financed by


k debt - (Line of credit) 422.87 611.78 In $ thousands

TATEMENT
Cash flow during the year
ractional values

g term debt of 625000$ . Int is n


ng Need(Plug) of 422870$ as it was
d of 422870$ will be
talments from year 1998
Question 4
What will be the impact of on TCI's external funding requirements as of the end of 19
a) inventory were not reduced by the end of 1996
b) Accrued Expenses were to grow less than expected in the year 1996

Solution
a) If inventory was not reduced by the end of 1996 then the External Financing need for the year 1996 will be increased
Also the external funding need for the year 1997 will be reduced to 15660$ .
It can be seen here

b) If the accrued expense were to grow less than expected in 1996, then the total of liabilities will be reduced and henc
For Example: if we reduce accrued expenses ratio to sales to 4%, then the external financing need in 1996 increased to
it can be seen here

ANSWERS
Assumptions
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation ,
And that forecasted percentage is derived by finding the item as a % of sales for yr 1995. For ex-COGS in 1995 is 58% of sales in 1995. And
2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and w
So interest on the pulg for 1996 will be charged in the year 1997
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest r
4. We are assuming income tax rate of year 1995 for the future years
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest

4a)
Exhibit 1 Financial Statements for Tire City, Inc.

In $ thousands
For years ending 12/31 1993 1994 1995

INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 20%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190

Dividends $155 $200 $240 20%

BALANCE SHEET

Assets
Cash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 7%
Total current liabilities 2,312 2,882 3,218

Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983

External financing need financed by


Bank debt - (Line of credit)

4b)
Exhibit 1 Financial Statements for Tire City, Inc.

In $ thousands
For years ending 12/31 1993 1994 1995

INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 20%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190
Dividends $155 $200 $240 20%
BALANCE SHEET
In $ thousands
For years ending 12/31 1993 1994 1995
Assets
Cash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 4%
Total current liabilities 2,312 2,882 3,218

Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983


External financing need financed by
Bank debt - (Line of credit)
ments as of the end of 1996 if:

e year 1996

d for the year 1996 will be increased from 422870$ to $987870.

liabilities will be reduced and hence the external financing need required in 1996 and 1997 will be more.
financing need in 1996 increased to 1278230$ and in 1997 increased to 753540$

ANSWERS
h, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
OGS in 1995 is 58% of sales in 1995. And this 58% is assumed to be the forecasting rate for future years for COGS
he management is conservative and will take extra liability as late as it can.

actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values

will be outstanding interest

In $ thousands
1996 1997

growth in sales 28206 33847.2 Int expense $62.50


% of sales 16334.4 19,601 O/s Int Exp $98.79
11871.6 14245.92 Net int Exp $161.29

% of sales 8965.2 10,758


213 333
$75.00 $161.29 We are providing interest @ 10% on long term debt of 625000$ . Int is n
2618.4 2993.393 also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was
% of sales 1145.16 1309.17 borrowed at the end of 1995
1473.24 1,684

as a % of PAT 297.12 339.68

% of sales 846.18 1015.416


% of sales 4382.4 5,259
% of sales 2,190 3,154 Inventory remains the same as in year 1995
7418.58 9,428

6,163 6,563
1,941 2,274
4,222 4,289

11,640.58 13,716.90

constant - given $125 $125


$987.87 $1,003.53
% of sales 1728 2073.6
$98.79 int @ 10% on the 1995 Ext Fin Need of 987870$ will be
% of sales 1983.6 2380.32 outstanding as it will be repaid in instalments from year 1998
$4,824.47 5,681.23

decreases by $125 625 500

remains constant 1,135 1,135


5,056.11 6,400.66
6,191.11 7,535.66

11,640.58 13,716.90

financing need financed by


k debt - (Line of credit) 987.87 15.66

In $ thousands
1996 1997

growth in sales 28206 33847.2


% of sales 16334.4 19,601
11871.6 14245.92

% of sales 8965.2 10,758


213 333
$75.00 $190.32
2618.4 2964.357
% of sales 1145.16 1296.47
1473.24 1,668
as a % of PAT 297.12 336.38

In $ thousands
1996 1997

% of sales 846.18 1015.416


% of sales 4382.4 5,259
% of sales 1625 3,154
6853.58 9,428

6,163 6,563
1,941 2,274
4,222 4,289

11,075.58 13,716.90

constant - given $125 $125


$1,278.23 $2,013.96
% of sales 1728 2073.6
$127.82
% of sales 1128.24 1353.888 Reduced from 7% to 4%
$4,259.47 5,694.27

decreases by $125 625 500

remains constant 1,135 1,135


5,056.11 6,387.62
6,191.11 7,522.62

11,075.58 13,716.90
financing need financed by
k debt - (Line of credit) 1,278.23 735.74
ractional values

g term debt of 625000$ . Int is n


ng Need(Plug) of 422870$ as it was
d of 987870$ will be
talments from year 1998
Question 5
What would be the impact on TCI's external funding requirements as of end of 1997 if
a) TCI depreciated more than 5% of the warehouse's total cost in 1997
b)TCI experienced higher price inflation in its revenues and operating costs (but not in the costs of
c) Days receivable were reduced to 45 days or days payables were increased to 45 days

Solution
a) If TCI Depreciated more than 5% of the warehouse total cost in 1997, then the external financing need will also redu
Reasoning: Depreciated more than 5% ==> Total Assets will decrease
Depreciated more than 5% ==>PAT for 1997 will be lesser ==> Retained earnings will be lesser ==> total liabilities will b
==> external funding need required will be less
Example: If Depreciation was increased fom 5% to 10% on warehouse total cost, then external financing need reduced
It can be seen here

b)TCI experienced higher price inflation in its revenues and operating costs for both the years then, external funding n
For Example: the inflation is 10%, then all our growth percentage in sales will be from 20% to ((1+0.2)*(1+0.1)-1) % whi
the price inflation in sales which show its effect on operating costs as it is calculated as a percentage of sales
hence our external funding requirement in th year 1996 will be increased to 444020$ and in 1997 will be increased to 11
It can be seen here

c) Days receivables were reduced to 45 days , or days payables were increased to 45 days
1996 1997
old Days receivable 51.98461 51.9846 days
New A/R is 3302.904 5043 ('000$)
Surplus funds invested in
Marketable securities 656.63 ('000$)

External financing need financed


by Bank debt - (Line of credit) 842.04 ('000$)
So when Days receivables were reduced, the External funding was nto required in 1996 instead we have to invest the surplus in m

And in 1997 the external funding required increased to 842040$


It can be seen here
ANSWERS

5a)
Assumptions
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation ,
And that forecasted percentage is derived by finding the item as a % of sales for yr 1995. For ex-COGS in 1995 is 58% of sales in 1995. And
2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and w
So interest on the pulg for 1996 will be charged in the year 1997
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest r
4. We are assuming income tax rate of year 1995 for the future years
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest

Exhibit 1 Financial Statements for Tire City, Inc.

In $ thousands
For years ending 12/31 1993 1994 1995
INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 20%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190

Dividends $155 $200 $240 20%

BALANCE SHEET

Assets
Cash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 7%
Total current liabilities 2,312 2,882 3,218

Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983

External financing need financed by


Bank debt - (Line of credit)
5 b)
Exhibit 1 Financial Statements for Tire City, Inc.

In $ thousands
For years ending 12/31 1993 1994 1995

INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 32%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190

Dividends $155 $200 $240 20%

BALANCE SHEET

Assets
Cash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 7%
Total current liabilities 2,312 2,882 3,218

Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983


External financing need financed by
Bank debt - (Line of credit)

5 c)
In $ thousands
For years ending 12/31 1993 1994 1995

INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 20%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190

Dividends $155 $200 $240 20%

BALANCE SHEET

Assets
Cash $508 $609 $706 3%
Marketable securities - plug
Accounts receivable 2,545 3,095 3,652
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 7%
Total current liabilities 2,312 2,882 3,218
Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983

Surplus funds invested in Marketable


securities
External financing need financed by
Bank debt - (Line of credit)
of end of 1997 if

costs (but not in the costs of its warehouse expansion) than was originally anticipated in 1996 and 1997
creased to 45 days

ternal financing need will also reduce

l be lesser ==> total liabilities will be lesser but not as less as assets due to tax effect on retined earnings

en external financing need reduced to 545680$

h the years then, external funding need required will be more


om 20% to ((1+0.2)*(1+0.1)-1) % which is 32%
ed as a percentage of sales
$ and in 1997 will be increased to 1174470$

ead we have to invest the surplus in marketable securitites

ANSWERS

h, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
OGS in 1995 is 58% of sales in 1995. And this 58% is assumed to be the forecasting rate for future years for COGS
he management is conservative and will take extra liability as late as it can.

actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values

will be outstanding interest

In $ thousands
1996 1997
growth in sales 28206 33847.2
% of sales 16334.4 19,601
11871.6 14245.92

% of sales 8965.2 10,758


213 453 Depreciation rate is increased from 5% to 10%
$75.00 $104.79 only on warehouse expenditure
2618.4 2929.893348
% of sales 1145.16 1281.40
1473.24 1,648

as a % of PAT 297.12 332.47

% of sales 846.18 1015.416


% of sales 4382.4 5,259
% of sales 1625 3,154
6853.58 9,428

6,163 6,563
1,941 2,394
4,222 4,169

11,075.58 13,596.90

constant - given $125 $125


$422.87 $968.55
% of sales 1728 2073.6
$42.29 int @ 10% on the 1995 Ext Fin Need of 422870$ will be
% of sales 1983.6 2380.32 outstanding as it will be repaid in instalments from year 1998
$4,259.47 5,589.75

decreases by $125 625 500

remains constant 1,135 1,135


5,056.11 6,372.14
6,191.11 7,507.14

11,075.58 13,596.90

financing need financed by


k debt - (Line of credit) 422.87 545.68 this reduced from 611.78 thousand $ to 587.97 thousand $
In $ thousands
1996 1997

Sales growth forecast increased from 20% to 32%

growth in sales 31026.6 40955.112 Int expense $62.50


% of sales 17967.84 23,718 O/s Int Exp $44.40
13058.76 17237.5632 Net int Exp $106.90

% of sales 9861.72 13,017


213 333
$75.00 $106.90 We are providing interest @ 10% on long term debt of 625000$ . Int is n
2909.04 3780.191099 also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was
% of sales 1272.28 1653.28 borrowed at the end of 1995
1636.76 2,127

as a % of PAT 330.10 428.96

% of sales 930.798 1228.65336


% of sales 4820.64 6,363
% of sales 1625 3,816
7376.438 11,408

6,163 6,563
1,941 2,274
4,222 4,289

11,598.44 15,696.75

constant - given $125 $125


$444.02 $1,618.49
% of sales 1900.8 2509.056
$44.40 int @ 10% on the 1995 Ext Fin Need of 422870$ will be
% of sales 2181.96 2880.1872 outstanding as it will be repaid in instalments from year 1998
$4,651.78 7,177.13

decreases by $125 625 500

remains constant 1,135 1,135


5,186.66 6,884.62
6,321.66 8,019.62

11,598.44 15,696.75
financing need financed by
k debt - (Line of credit) 444.02 1,174.47 increase in external financing need due to increase in sales growth rate

In $ thousands
1996 1997

growth in sales 28206 33847.2


% of sales 16334.4 19,601
11871.6 14245.92

% of sales 8965.2 10,758


213 333
$75.00 $62.50
2618.4 3092.18
% of sales 1145.16 1352.37
1473.24 1,740

as a % of PAT 297.12 350.89

% of sales 846.18 1015.416


656.63
3302.90 5042.98 New A/R
% of sales 1625 3,154
6430.71348 9,212

6,163 6,563
1,941 2,274
4,222 4,289

10,652.71 13,501.00

constant - given $125 $125


$842.04
% of sales 1728 2073.6

% of sales 1983.6 2380.32


$3,836.60 5,420.96
decreases by $125 625 500

remains constant 1,135 1,135


5,056.11 6,445.04
6,191.11 7,580.04

10,652.71 13,501.00

unds invested in Marketable


securities 656.63
financing need financed by
k debt - (Line of credit) 842.04
ated in 1996 and 1997

ctional values
d of 422870$ will be
talments from year 1998

$ to 587.97 thousand $
g term debt of 625000$ . Int is n
ng Need(Plug) of 422870$ as it was

d of 422870$ will be
talments from year 1998
ncrease in sales growth rate
Question 6
Suppose the proposed terms of the bank credit included a covenant that limits TCI to keep a net wo
Is TCI likely to be able to be able to satisfy this covenant in 1996 and 1997
Solution
TCI is not able to satisfy this covenant neither in year 1996 nor in year 1997
See here for working

Assumptions
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation ,
And that forecasted percentage is derived by finding the item as a % of sales for yr 1995. For ex-COGS in 1995 is 58% of sales in 1995. And
2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and w
So interest on the pulg for 1996 will be charged in the year 1997
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest r
4. We are assuming income tax rate of year 1995 for the future years
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest

Exhibit 1 Financial Statements for Tire City, Inc.


INCOME STATEMENT
In $ thousands
For years ending 12/31 1993 1994 1995

INCOME STATEMENT

Net sales $16,230 $20,355 $23,505 20%


Cost of sales 9,430 11,898 13,612 58%
Gross profit 6,800 8,457 9,893
Selling, general, and
administrative expenses 5,195 6,352 7,471 32%
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income 1,326 1,819 2,115
Income taxes 546 822 925 44%
Net income $780 $997 $1,190

Dividends $155 $200 $240 20%

BALANCE SHEET
In $ thousands
For years ending 12/31 1993 1994 1995
Assets
Cash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Total current assets 4,683 5,542 6,548

Gross plant & equipment 3,232 3,795 4,163


Accumulated depreciation 1,335 1,515 1,728
Net plant & equipment 1,897 2,280 2,435

Total assets $6,580 $7,822 $8,983

LIABILITIES

Current maturities of
long-term debt $125 $125 $125 constant - given
Bank Debt - plug
Accounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Accrued expenses 1,145 1,432 1,653 7%
Total current liabilities 2,312 2,882 3,218

Long-term debt 1,000 875 750 decreases by $125

Common stock 1,135 1,135 1,135 remains constant


Retained earnings 2,133 2,930 3,880
Total shareholders’ equity 3,268 4,065 5,015

Total liabilities $6,580 $7,822 $8,983

External financing need financed by


Bank debt - (Line of credit)

Calculation of Net Working capital


In $ thousands
1996 1997
Cash 846.18 1015.42
Accounts receivable 4382.4 5258.88
Inventories 1625 3153.6
Total current assets 6853.58 9427.9

Current maturities of
long-term debt $125 $125
Bank Debt - plug $423 $1,035
Accounts payable $1,728 $2,074
Accrued interest Expense $0 $42
Accrued expenses $1,984 $2,380
Total current liabilities $4,259 $5,656

Net Working Capital $2,594 $3,772 < 4000


TCI is not able to satisfy this covenant neither in year 1996 nor in y
hat limits TCI to keep a net working capital pf stleast 4$million as of end of each year

h, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
OGS in 1995 is 58% of sales in 1995. And this 58% is assumed to be the forecasting rate for future years for COGS
he management is conservative and will take extra liability as late as it can.

actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values

will be outstanding interest

ME STATEMENT
In $ thousands
1996 1997

growth in sales 28206 33847.2 Int expense $62.50


% of sales 16334.4 19,601 O/s Int Exp $42.29
11871.6 14245.92 Net int Exp $104.79

% of sales 8965.2 10,758


213 333
$75.00 $104.79 We are providing interest @ 10% on long term debt of 625000$ . Int is n
2618.4 3049.893 also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was
% of sales 1145.16 1333.88 borrowed at the end of 1995
1473.24 1,716

as a % of PAT 297.12 346.09

CE SHEET
In $ thousands
1996 1997

% of sales 846.18 1015.416


% of sales 4382.4 5,259
% of sales 1625 3,154
6853.58 9,428

6,163 6,563
1,941 2,274
4,222 4,289

11,075.58 13,716.90

constant - given $125 $125


$422.87 $1,034.65
% of sales 1728 2073.6
$42.29 int @ 10% on the 1995 Ext Fin Need of 422870$ will be
% of sales 1983.6 2380.32 outstanding as it will be repaid in instalments from year 1998
$4,259.47 5,655.85

decreases by $125 625 500

remains constant 1,135 1,135


5,056.11 6,426.04
6,191.11 7,561.04

11,075.58 13,716.90

financing need financed by


k debt - (Line of credit) 422.87 611.78

venant neither in year 1996 nor in year 1997


ractional values

g term debt of 625000$ . Int is n


ng Need(Plug) of 422870$ as it was
d of 422870$ will be
talments from year 1998