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, Depreciation , inter 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 this 5

2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will ta 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 rate i 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 1994

For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends BALANCE SHEET Assets Cash Accounts receivable Inventories Total current assets Gross plant & equipment Accumulated depreciation Net plant & equipment Total assets LIABILITIES

1993

1995

$16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155

$20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200

$23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240

20% 58%

32%

44%

20%

$508 2,545 1,630 4,683 3,232 1,335 1,897 $6,580

$609 3,095 1,838 5,542 3,795 1,515 2,280 $7,822

$706 3,652 2,190 6,548 4,163 1,728 2,435 $8,983

3% 16% 9%

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities

$125 1,042 1,145 2,312

$125 1,325 1,432 2,882

$125 1,440 1,653 3,218

constant - given 6% 7%

Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

1,000 1,135 2,133 3,268 $6,580

875 1,135 2,930 4,065 $7,822

750 1,135 3,880 5,015 $8,983

decreases by $125 remains constant

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

except cash, inventory, Gross assets, Depreciation , interest, long term debt and current maturities For ex-COGS in 1995 is 58% of sales in 1995. And this 58% is assumed to be the forecasting rate for future years for COGS

year as the management is conservative and will take extra liability as late as it can.

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

6 and it will be outstanding interest

In $ thousands 1996 1997

growth in sales % of sales

28206 33847.2 16334.4 19,601 11871.6 14245.92 8965.2 213 10,758 333

Int expense O/s Int Exp Net int Exp

$62.50 $42.29 $104.79

% of sales

% of sales

$75.00 $104.79 2618.4 3049.893 1145.16 1333.88 1473.24 1,716 297.12 346.09

We are providing interest @ 10% on long term debt of 625000$ . Int is n also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was borrowed at the end of 1995

as a % of PAT

% of sales % of sales % of sales

846.18 1015.416 4382.4 5,259 1625 3,154 6853.58 9,428 6,163 1,941 4,222 6,563 2,274 4,289

11,075.58 13,716.90

constant - given % of sales % of sales

$125 $125 $422.87 $1,034.65 This is the plug 1728 2073.6 $42.29 int @ 10% on the 1995 Ext Fin Need of 422870$ will be 1983.6 2380.32 outstanding as it will be repaid in instalments from year 1998 $4,259.47 5,655.85

decreases by $125 remains constant

625 1,135 5,056.11 6,191.11

500 1,135 6,426.04 7,561.04

11,075.58 13,716.90 External financing need financed by Bank debt - (Line of credit)

422.87

611.78

o avoid fractional values

10% on long term debt of 625000$ . Int is n Ext Financing Need(Plug) of 422870$ as it was

t Fin Need of 422870$ will be paid in instalments from year 1998

For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends

1993 16230 9430 6800 5195 160 119 1326 546 780 155

1994 20355 11898 8457 6352 180 106 1819 822 997 200

1995 23505 13612 9893 7471 213 94 2115

1996

1997

28206 33847.2 16334.4 19601.28 11871.6 14245.92 8965.2 10758.24 213 333 75 104.7867 2618.4 3049.893

925 1145.163 1333.878 0.437352 1190 1473.237 1716.016 240 297.1234 346.0872

BALANCE SHEET Assets Cash Accounts receivable Inventories Total current assets

508 2545 1630 4683

609 3095 1838 5542

706 3652 2190 6548

846.18 1015.416 4382.4 5258.88 1625 3153.6 6853.58 9427.896

Gross plant & equipment Accumulated depreciation Net plant & equipment Total assets

3232 1335 1897 6580

3795 1515 2280 7822

4163 1728 2435

6163 1941 4222

6563 2274 4289 13716.9

8983 11075.58

LIABILITIES Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

125 1042 1145 2312 1000 1135 2133 3268 6580

125 1325 1432 2882 875 1135 2930 4065 7822

125 125 422.8665 1034.647 1440 1728 2073.6 42.28665 1653 1983.6 2380.32 3218 4259.467 5655.854 750 625 500 1135 1135 1135 3880 5056.113 6426.042 5015 6191.113 7561.042 8983 11075.58 13716.9

125

Profitability Ratios 1993 Gross Profit Margin Profit Margin ROE ROIC 41.90% 4.81% 23.87% 19.84% 1994 41.55% 4.90% 24.53% 21.39% 1995 42.09% 5.06% 23.73% 21.56% 1996 42.09% 5.22% 23.80% 20.93% 1997 42.09% 5.07% 22.70% 19.51%

Activity Ratio 1993 ROA Accounts Receivables Turn Over Ratio Collection Period Inventory Turn Over Ratio NFA turn over 1994 1995 1996 1997

2.466565 2.602276 2.616609 2.546684 2.467555 6.37721 6.576737 6.436199 6.436199 6.436199 57.23506 55.49865 56.71049 56.71049 56.71049 5.785276 6.473341 6.215525 10.05194 6.215525 8.555614 8.927632 9.652977 6.68072 7.89163

Solvency Ratio 1993 Debt to Equity Ratio Interest Coverage Ratio Debt Service coverage Ratio 1994 1995 1996 1997

0.234302 0.177126 0.130095 0.144753 0.168722 12.14286 18.16038 23.5 35.912 30.10574 4.235501 5.865972 6.986883 9.063686 9.6488

Liquidity Ratio 1993 Current Ratio Quick Ratio Net Working Capital 1994 1995 1996 1997

2.025519 1.92297 2.034804 1.786368 2.040137 1.320502 1.285219 1.354257 1.362816 1.357718 2371 2660 3330 2171.247 2737.395

Q1) Profit Margin ROC Collection period Inventory Turn Over Ratio Debt -Equity Ratio Quick Ratio Current Ratio

These are the critical ratios which gives insights into the financial h Hence, the financial health of the company is good.

Q3) Profit Margin

ROC Collection period Inventory Turn Over Ratio Debt -Equity Ratio Quick Ratio Current Ratio

Q8)

TCIs 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 Improvement Improvement No Change No change No Change 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 assu balance sheet and cash flow statement for 1996 and 1997. As a prelimnary assumption assume that any new financing need wi

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 ra 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
For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends $16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155 $20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200 $23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240 20% 58% 1993 In $ thousands 1994 1995

32%

44%

20%

BALANCE SHEET
For years ending 12/31 Assets Cash Accounts receivable Inventories Total current assets Gross plant & equipment Accumulated depreciation Net plant & equipment 1993 $508 2,545 1,630 4,683 3,232 1,335 1,897 In $ thousands 1994 $609 3,095 1,838 5,542 3,795 1,515 2,280 1995 $706 3,652 2,190 6,548 4,163 1,728 2,435 3% 16% 9%

Total assets LIABILITIES

$6,580

$7,822

$8,983

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

$125 1,042 1,145 2,312 1,000 1,135 2,133 3,268 $6,580

$125 1,325 1,432 2,882 875 1,135 2,930 4,065 $7,822

$125 1,440 1,653 3,218 750 1,135 3,880 5,015 $8,983

constant - given 6% 7%

decreases by $125 remains constant

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

CASH FLOW STATEMENT

in/out flow Operating activities Net profit after dividend Add: Non cash/adjustments Depreciation Interest expense (disclosed seperately) Increase/decrease in working capital Increase in Accounts receivable Decrease in inventory Increase in payables Increase in accrued expenses Investing activities Purchase of fixed assets Financing activities Proceeds from borrowings Repayment of borrowings Interest paid

1996

1997

1176.11 213 $75.00 Outflow Inflow inflow inflow a outflow b inflow outflow outflow c d -730 565 288 331 1917.31 -2,000 -2,000 $422.87 -$125 -$75.00 222.87 140.18

1369.93 333 $104.79 -876 -1,529 outflow 346 397 144.96 -400 -400 $611.78 -$125 -$62.50 424.28 169.24 Cash flow during the year

Total a +b+c

Cash at the beginning of the period Total cash balance - End of the year As per financials Difference

$706 846.18 846.18 1015.416 846.18 1015.42 0.00 0.00

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

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

e 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

ll be outstanding interest

ME STATEMENT
In $ thousands 1996 1997

growth in sales % of sales

28206 33847.2 16334.4 19,601 11871.6 14245.92 8965.2 213 10,758 333

Int expense O/s Int Exp Net int Exp

$62.50 $42.29 $104.79

% of sales

% of sales

$75.00 $104.79 2618.4 3049.893 1145.16 1333.88 1473.24 1,716 297.12 346.09

We are providing interest @ 10% on long term debt of 625000$ . Int is n also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was borrowed at the end of 1995

as a % of PAT

CE SHEET
In $ thousands 1996 1997 % of sales % of sales % of sales 846.18 1015.416 4382.4 5,259 1625 3,154 6853.58 9,428 6,163 1,941 4,222 6,563 2,274 4,289

11,075.58 13,716.90

constant - given % of sales % of sales

$125 $125 $422.87 $1,034.65 1728 2073.6 $42.29 1983.6 2380.32 $4,259.47 5,655.85 625 1,135 5,056.11 6,191.11 500 1,135 6,426.04 7,561.04

int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998

decreases by $125 remains constant

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

actional values

ng 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
It can be seen here

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$ .

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 ra 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 1994

For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends BALANCE SHEET Assets Cash Accounts receivable

1993

1995

$16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155

$20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200

$23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240

20% 58%

32%

44%

20%

$508 2,545

$609 3,095

$706 3,652

3% 16%

Inventories Total current assets Gross plant & equipment Accumulated depreciation Net plant & equipment Total assets LIABILITIES

1,630 4,683 3,232 1,335 1,897 $6,580

1,838 5,542 3,795 1,515 2,280 $7,822

2,190 6,548 4,163 1,728 2,435 $8,983

9%

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

$125 1,042 1,145 2,312 1,000 1,135 2,133 3,268 $6,580

$125 1,325 1,432 2,882 875 1,135 2,930 4,065 $7,822

$125 1,440 1,653 3,218 750 1,135 3,880 5,015 $8,983

constant - given 6% 7%

decreases by $125 remains constant

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

4b)
Exhibit 1 Financial Statements for Tire City, Inc. In $ thousands 1994

For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends

1993

1995

$16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155

$20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200

$23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240

20% 58%

32%

44%

20%

BALANCE SHEET

For years ending 12/31 Assets Cash Accounts receivable Inventories Total current assets Gross plant & equipment Accumulated depreciation Net plant & equipment Total assets LIABILITIES

1993 $508 2,545 1,630 4,683 3,232 1,335 1,897 $6,580

In $ thousands 1994 $609 3,095 1,838 5,542 3,795 1,515 2,280 $7,822

1995 $706 3,652 2,190 6,548 4,163 1,728 2,435 $8,983 3% 16% 9%

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

$125 1,042 1,145 2,312 1,000 1,135 2,133 3,268 $6,580

$125 1,325 1,432 2,882 875 1,135 2,930 4,065 $7,822

$125 1,440 1,653 3,218 750 1,135 3,880 5,015 $8,983

constant - given 6% 4%

decreases by $125 remains constant

External financing need financed by

ments as of the end of 1996 if:

he year 1996
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

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

e 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

ll be outstanding interest

In $ thousands 1996 1997

growth in sales % of sales

28206 33847.2 16334.4 19,601 11871.6 14245.92 8965.2 213 10,758 333

Int expense O/s Int Exp Net int Exp

$62.50 $98.79 $161.29

% of sales

% of sales

$75.00 $161.29 2618.4 2993.393 1145.16 1309.17 1473.24 1,684 297.12 339.68

We are providing interest @ 10% on long term debt of 625000$ . Int is n also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was borrowed at the end of 1995

as a % of PAT

% of sales % of sales

846.18 1015.416 4382.4 5,259

% of sales

2,190 7418.58 6,163 1,941 4,222

3,154 9,428 6,563 2,274 4,289

Inventory remains the same as in year 1995

11,640.58 13,716.90

constant - given % of sales % of sales

$125 $125 $987.87 $1,003.53 1728 2073.6 $98.79 1983.6 2380.32 $4,824.47 5,681.23 625 1,135 5,056.11 6,191.11 500 1,135 6,400.66 7,535.66

int @ 10% on the 1995 Ext Fin Need of 987870$ will be outstanding as it will be repaid in instalments from year 1998

decreases by $125 remains constant

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 % of sales

28206 33847.2 16334.4 19,601 11871.6 14245.92 8965.2 10,758 213 333 $75.00 $190.32 2618.4 2964.357 1145.16 1296.47 1473.24 1,668 297.12 336.38

% of sales

% of sales

as a % of PAT

In $ thousands 1996 1997 % of sales % of sales % of sales 846.18 1015.416 4382.4 5,259 1625 3,154 6853.58 9,428 6,163 1,941 4,222 6,563 2,274 4,289

11,075.58 13,716.90

constant - given % of sales % of sales

$125 $125 $1,278.23 $2,013.96 1728 2073.6 $127.82 1128.24 1353.888 $4,259.47 5,694.27 625 1,135 5,056.11 6,191.11 500 1,135 6,387.62 7,522.62

Reduced from 7% to 4%

decreases by $125 remains constant

11,075.58 13,716.90 1,278.23 735.74

financing need financed by

actional values

ng 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 o 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 51.985 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 ra 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 1994

For years ending 12/31 INCOME STATEMENT

1993

1995

Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends BALANCE SHEET Assets Cash Accounts receivable Inventories Total current assets Gross plant & equipment Accumulated depreciation Net plant & equipment Total assets LIABILITIES

$16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155

$20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200

$23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240

20% 58%

32%

44%

20%

$508 2,545 1,630 4,683 3,232 1,335 1,897 $6,580

$609 3,095 1,838 5,542 3,795 1,515 2,280 $7,822

$706 3,652 2,190 6,548 4,163 1,728 2,435 $8,983

3% 16% 9%

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

$125 1,042 1,145 2,312 1,000 1,135 2,133 3,268 $6,580

$125 1,325 1,432 2,882 875 1,135 2,930 4,065 $7,822

$125 1,440 1,653 3,218 750 1,135 3,880 5,015 $8,983

constant - given 6% 7%

decreases by $125 remains constant

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

5 b)

Exhibit 1

Financial Statements for Tire City, Inc. In $ thousands 1994

For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends BALANCE SHEET Assets Cash Accounts receivable Inventories Total current assets Gross plant & equipment Accumulated depreciation Net plant & equipment Total assets LIABILITIES

1993

1995

$16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155

$20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200

$23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240

32% 58%

32%

44%

20%

$508 2,545 1,630 4,683 3,232 1,335 1,897 $6,580

$609 3,095 1,838 5,542 3,795 1,515 2,280 $7,822

$706 3,652 2,190 6,548 4,163 1,728 2,435 $8,983

3% 16% 9%

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

$125 1,042 1,145 2,312 1,000 1,135 2,133 3,268 $6,580

$125 1,325 1,432 2,882 875 1,135 2,930 4,065 $7,822

$125 1,440 1,653 3,218 750 1,135 3,880 5,015 $8,983

constant - given 6% 7%

decreases by $125 remains constant

External financing need financed by

5 c)
For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends BALANCE SHEET Assets Cash Marketable securities - plug Accounts receivable Inventories Total current assets Gross plant & equipment Accumulated depreciation Net plant & equipment Total assets LIABILITIES $16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155 $20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200 $23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240 20% 58% 1993 In $ thousands 1994 1995

32%

44%

20%

$508 2,545 1,630 4,683 3,232 1,335 1,897 $6,580

$609 3,095 1,838 5,542 3,795 1,515 2,280 $7,822

$706 3,652 2,190 6,548 4,163 1,728 2,435 $8,983

3%

9%

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

$125 1,042 1,145 2,312 1,000 1,135 2,133 3,268 $6,580

$125 1,325 1,432 2,882 875 1,135 2,930 4,065 $7,822

$125 1,440 1,653 3,218 750 1,135 3,880 5,015 $8,983

constant - given 6% 7%

decreases by $125 remains constant

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

ead we have to invest the surplus in marketable securitites

ANSWERS

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

e 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

ll be outstanding interest

In $ thousands 1996 1997

growth in sales % of sales

28206 16334.4 11871.6 8965.2 213

33847.2 19,601 14245.92 10,758 453

% of sales

Depreciation rate is increased from 5% to 10% only on warehouse expenditure

% of sales

$75.00 $104.79 2618.4 2929.893348 1145.16 1281.40 1473.24 1,648 297.12 332.47

as a % of PAT

% of sales % of sales % of sales

846.18 4382.4 1625 6853.58 6,163 1,941 4,222 11,075.58

1015.416 5,259 3,154 9,428 6,563 2,394 4,169 13,596.90

constant - given % of sales % of sales

$125 $422.87 1728 1983.6 $4,259.47 625 1,135 5,056.11 6,191.11 11,075.58

$125 $968.55 2073.6 $42.29 2380.32 5,589.75 500 1,135 6,372.14 7,507.14 13,596.90

int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998

decreases by $125 remains constant

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 % of sales 31026.6 17967.84 13058.76 40955.112 23,718 17237.5632 Int expense O/s Int Exp Net int Exp $62.50 $44.40 $106.90

% of sales

% of sales

9861.72 13,017 213 333 $75.00 $106.90 2909.04 3780.191099 1272.28 1653.28 1636.76 2,127 330.10 428.96

We are providing interest @ 10% on long term debt of 625000$ . Int is n also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was borrowed at the end of 1995

as a % of PAT

% of sales % of sales % of sales

930.798 4820.64 1625 7376.438 6,163 1,941 4,222 11,598.44

1228.65336 6,363 3,816 11,408 6,563 2,274 4,289 15,696.75

constant - given % of sales % of sales

$125 $444.02 1900.8 2181.96 $4,651.78 625 1,135 5,186.66 6,321.66 11,598.44 444.02

$125 $1,618.49 2509.056 $44.40 2880.1872 7,177.13 500 1,135 6,884.62 8,019.62 15,696.75

int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998

decreases by $125 remains constant

financing need financed by

1,174.47 increase in external financing need due to increase in sales growth rate

In $ thousands 1996 1997

growth in sales % of sales

28206 16334.4 11871.6 8965.2 213 $75.00 2618.4 1145.16 1473.24 297.12

33847.2 19,601 14245.92 10,758 333 $62.50 3092.18 1352.37 1,740 350.89

% of sales

% of sales

as a % of PAT

% of sales

846.18 656.63 3302.90 % of sales 1625 6430.71348 6,163 1,941 4,222 10,652.71

1015.416 5042.98 3,154 9,212 6,563 2,274 4,289 13,501.00 New A/R

constant - given % of sales % of sales

$125 1728 1983.6 $3,836.60 625 1,135 5,056.11 6,191.11 10,652.71

$125 $842.04 2073.6 2380.32 5,420.96 500 1,135 6,445.04 7,580.04 13,501.00

decreases by $125 remains constant

unds invested in Marketable securities

656.63 842.04

financing need financed by k debt - (Line of credit)

pated in 1996 and 1997

ctional values

d of 422870$ will be talments from year 1998

$ to 587.97 thousand $

ng 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 Solution
TCI is not able to satisfy this covenant neither in year 1996 nor in year 1997

Suppose the proposed terms of the bank credit included a covenant that limits TCI to keep a net w Is TCI likely to be able to be able to satisfy this covenant in 1996 and 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 ra 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
For years ending 12/31 INCOME STATEMENT Net sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation Net interest expense Pre-tax income Income taxes Net income Dividends $16,230 9,430 6,800 5,195 160 119 1,326 546 $780 $155 $20,355 11,898 8,457 6,352 180 106 1,819 822 $997 $200 $23,505 13,612 9,893 7,471 213 94 2,115 925 $1,190 $240 20% 58% 1993 In $ thousands 1994 1995

32%

44%

20%

BALANCE SHEET
For years ending 12/31 Assets Cash Accounts receivable Inventories Total current assets Gross plant & equipment Accumulated depreciation 1993 $508 2,545 1,630 4,683 3,232 1,335 In $ thousands 1994 $609 3,095 1,838 5,542 3,795 1,515 1995 $706 3,652 2,190 6,548 4,163 1,728 3% 16% 9%

Net plant & equipment Total assets LIABILITIES

1,897 $6,580

2,280 $7,822

2,435 $8,983

Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Long-term debt Common stock Retained earnings Total shareholders equity Total liabilities

$125 1,042 1,145 2,312 1,000 1,135 2,133 3,268 $6,580

$125 1,325 1,432 2,882 875 1,135 2,930 4,065 $7,822

$125 1,440 1,653 3,218 750 1,135 3,880 5,015 $8,983

constant - given 6% 7%

decreases by $125 remains constant

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

Calculation of Net Working capital

Cash Accounts receivable Inventories Total current assets Current maturities of long-term debt Bank Debt - plug Accounts payable Accrued interest Expense Accrued expenses Total current liabilities Net Working Capital In $ thousands 1996 1997 846.18 1015.4 4382.4 5258.9 1625 3153.6 6853.58 9427.9

$125 $423 $1,728 $0 $1,984 $4,259 $2,594

$125 $1,035 $2,074 $42 $2,380 $5,656 $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

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

e 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

ll be outstanding interest

ME STATEMENT
In $ thousands 1996 1997

growth in sales % of sales

28206 33847.2 16334.4 19,601 11871.6 14245.92 8965.2 213 10,758 333

Int expense O/s Int Exp Net int Exp

$62.50 $42.29 $104.79

% of sales

% of sales

$75.00 $104.79 2618.4 3049.893 1145.16 1333.88 1473.24 1,716 297.12 346.09

We are providing interest @ 10% on long term debt of 625000$ . Int is n also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was borrowed at the end of 1995

as a % of PAT

CE SHEET
In $ thousands 1996 1997 % of sales % of sales % of sales 846.18 1015.416 4382.4 5,259 1625 3,154 6853.58 9,428 6,163 1,941 6,563 2,274

4,222

4,289

11,075.58 13,716.90

constant - given % of sales % of sales

$125 $125 $422.87 $1,034.65 1728 2073.6 $42.29 1983.6 2380.32 $4,259.47 5,655.85 625 1,135 5,056.11 6,191.11 500 1,135 6,426.04 7,561.04

int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998

decreases by $125 remains constant

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

actional values

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

d of 422870$ will be talments from year 1998