Tire City: Forecasting Pro Forma Financial Statements

Tire City: forecasting pro forma financial statements.

1. Evaluate Tire City's (TCI) financial health. How well is it performing as of 1995?

Consider analyzing the following financial ratios in this context:

a) Profitability (return on sales, return on capital, return on equity);

b) Liquidity (current ratio, quick ratio);

c) Leverage (asset/equity; debt/total capital; interest coverage);

d) Activity ratios (sales/assets; days receivable; days inventory; days payable ).

2. Based on Mr. Martin's prediction for sales ($28.206 million in 1996 and $33.847 million in 1997), and other assumptions given in the case, prepare pro forma forecasted income statements and balance sheets for Tire City for 1996 and 1997. Assume preliminarily that any new financing required will be in the form of bank debt. Assume all debt (existing plus new bank debt) will bear interest of 10%.

3. Using your set of pro forma forecasts, assess the future financial health of the company as of 1997 end. Will the company be in a stronger or weaker condition two years from now? (You should consider analyzing the above-mentioned financial ratios based on the pro forma statements for 1996 and 1997 in this context).

4. What would be the impact on TCI's external financing needs at the end of 1996 if:

a. Inventories 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 TCI's external financing needs at the end of 1997 if:

a. TCI depreciated