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Finance 450 at EMU with Dr. Moeller

Tire City

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Tire City

Substantive Issues

The purpose of this case is to introduce students of finance to financial ratio analysis and pro forma forecasting.

Pedagogical Objectives

1. To assess the past performance and current financial health of the company.

2. To forecast income statements and balance sheets for the next two years, taking into account a planned warehouse expansion.

3. To determine borrowing needs created by the warehouse expansion.

4. To evaluate the future financial health of the company once the warehouse expansion project is finished.

Questions to be answered

1. Evaluate Tire City’s financial health. How well is the company performing?

2. Based on Mr. Martin’s 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 case, prepare a complete pro forma forecasts of Tire City’s 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 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?