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Tire CityHarvard Business School Case #297-091Case Software #XLS092
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard Business School.
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard Business School.
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 , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can. So interest on the pulg for 1996 will be charged in the year 19973. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values4. We are assuming income tax rate of year 1995 for the future years5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
In $ thousandsFor 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
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
AssetsCash $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
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest Expense
Exhibit 1 Financial Statements for Tire City, Inc.
Selling, general, and administrative expenses
Current maturities of long-term debt
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)
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can.
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 it was coming around 10.xx%. So we are taking 10% to avoid fractional values
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
In $ thousands1996 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 10,758213 333
$75.00 $104.79 We are providing interest @ 10% on long term debt of 625000$ . Int is n2618.4 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 19951473.24 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 6,5631,941 2,2744,222 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 $125 625 500
remains constant 1,135 1,1355,056.11 6,426.046,191.11 7,561.04
11,075.58 13,716.90
422.87 611.78External financing need financed by
Bank debt - (Line of credit)
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values
We are providing interest @ 10% on long term debt of 625000$ . Int is n
also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was
int @ 10% on the 1995 Ext Fin Need of 422870$ will be
outstanding as it will be repaid in instalments from year 1998
For years ending 12/31 1993 1994 1995 1996 1997INCOME 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
5195 6352 7471 8965.2 10758.24
Depreciation 160 180 213 213 333
Net interest expense119 106 94 75 104.7867
Pre-tax income 1326 1819 2115 2618.4 3049.893
Income taxes546 822 925 1145.163 1333.878 0.437352
Net income 780 997 1190 1473.237 1716.016
Dividends155 200 240 297.1234 346.0872
BALANCE SHEETAssetsCash 508 609 706 846.18 1015.416
Accounts receivable2545 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 assets6580 7822 8983 11075.58 13716.9
LIABILITIES
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
Selling, general, and administrative expenses
Current maturities of long-term debt
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
6.37721 6.576737 6.436199 6.436199 6.436199
Collection Period 57.23506 55.49865 56.71049 56.71049 56.71049
5.785276 6.473341 6.215525 10.05194 6.215525
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 0.168722Interest Coverage Ratio 12.14286 18.16038 23.5 35.912 30.10574
4.235501 5.865972 6.986883 9.063686 9.6488
Liquidity Ratio
1993 1994 1995 1996 1997
Current Ratio 2.025519 1.92297 2.034804 1.786368 2.040137Quick Ratio 1.320502 1.285219 1.354257 1.362816 1.357718
Net Working Capital 2371 2660 3330 2171.247 2737.395
Q1)Profit MarginROCCollection periodInventory Turn Over RatioDebt -Equity RatioQuick RatioCurrent Ratio
Q3)
Profit MarginROCCollection period
Accounts Receivables Turn Over Ratio
Inventory Turn Over Ratio
Debt Service coverage Ratio
These are the critical ratios which gives insights into the financial health of the company and they seem to be stable over the years. Hence, the financial health of the company is good.
Inventory Turn Over RatioDebt -Equity RatioQuick RatioCurrent 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.
Improvement ImprovementImprovement Improvement
No change DeteriorationImprovement Deterioration
Improvement Deterioration
Improvement No Change
No change No change
Improvement No Change
Improvement Deterioration
`
Deterioration ImprovementImprovement Improvement
Improvement Improvement
Improvement ImprovementImprovement Improvement
Improvement Deterioration
Increase/Decrease from 93 to 95
Increase/Decrease from 95 to 97
Increase/Decrease from 93 to 95
Increase/Decrease from 95 to 97
Increase/Decrease from 93 to 95
Increase/Decrease from 95 to 97
Increase/Decrease from 93 to 95
Increase/Decrease from 95 to 97
These are the critical ratios which gives insights into the financial health of the company and they seem to be stable over the years. Hence, the financial health of the company is good.
Question 2Based on Mr Martin's Sales predictions for 1996 sales of 28206000$ and for 1997 sales of 33847000 and relying on other assumptions provided in the case, prepare a pro forma income statementbalance sheet and cash flow statement for 1996 and 1997. As a prelimnary assumption assume that any new financing need will be required in the form of bank debt
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 , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can. So interest on the pulg for 1996 will be charged in the year 19973. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values4. We are assuming income tax rate of year 1995 for the future years5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
INCOME STATEMENT
In $ thousandsFor 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
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 $ thousandsFor years ending 12/31 1993 1994 1995
AssetsCash $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
Income statementBalance sheetCash flow statement
Exhibit 1 Financial Statements for Tire City, Inc.
Selling, general, and administrative expenses
LIABILITIES
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest ExpenseAccrued 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
CASH FLOW STATEMENT
in/out flow 1996 1997
Operating activitiesNet profit after dividend 1176.11 1369.93
Add: Non cash/adjustmentsDepreciation 213 333
Interest expense (disclosed seperately) $75.00 $104.79Increase/decrease in working capital
Increase in Accounts receivable Outflow -730 -876Decrease in inventory Inflow 565 -1,529 outflowIncrease in payables inflow 288 346
Increase in accrued expenses inflow 331 397a 1917.31 144.96
Investing activitiesPurchase of fixed assets outflow -2,000 -400
b -2,000 -400Financing activities
Proceeds from borrowings inflow $422.87 $611.78Repayment of borrowings outflow -$125 -$125
Interest paid outflow -$75.00 -$62.50c 222.87 424.28
Total a +b+c d 140.18 169.24 Cash flow during the yearCash at the beginning of the period e $706 846.18
Total cash balance - End of the year 846.18 1015.416As per financials 846.18 1015.42
Difference 0.00 0.00
Current maturities of long-term debt
External financing need financed by Bank debt - (Line of credit)
Based on Mr Martin's Sales predictions for 1996 sales of 28206000$ and for 1997 sales of 33847000 and relying on other assumptions provided in the case, prepare a pro forma income statementbalance sheet and cash flow statement for 1996 and 1997. As a prelimnary assumption assume that any new financing need will be required in the form of bank debt
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can.
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 it was coming around 10.xx%. So we are taking 10% to avoid fractional values
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
INCOME STATEMENT
In $ thousands1996 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 10,758213 333
$75.00 $104.79 We are providing interest @ 10% on long term debt of 625000$ . Int is n2618.4 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 19951473.24 1,716
as a % of PAT 297.12 346.09
BALANCE SHEET
In $ thousands1996 1997
% of sales 846.18 1015.416% of sales 4382.4 5,259% of sales 1625 3,154
6853.58 9,428
6,163 6,5631,941 2,2744,222 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 1,1355,056.11 6,426.046,191.11 7,561.04
11,075.58 13,716.90
422.87 611.78 In $ thousands
CASH FLOW STATEMENT
Cash flow during the year
External financing need financed by Bank debt - (Line of credit)
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 it was coming around 10.xx%. So we are taking 10% to avoid fractional values
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
int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998
Question 4What will be the impact of on TCI's external funding requirements as of the end of 1996 if:a) inventory were not reduced by the end of 1996b) Accrued Expenses were to grow less than expected in the year 1996
Solutiona) If inventory was not reduced by the end of 1996 then the External Financing need for the year 1996 will be increased from 422870$ to $987870.Also the external funding need for the year 1997 will be reduced to 15660$ .
b) If the accrued expense were to grow less than expected in 1996, then the total of liabilities will be reduced and hence the external financing need required in 1996 and 1997 will be more.For Example: if we reduce accrued expenses ratio to sales to 4%, then the external financing need in 1996 increased to 1278230$ and in 1997 increased to 753540$
ANSWERSAssumptions
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can. So interest on the pulg for 1996 will be charged in the year 19973. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values4. We are assuming income tax rate of year 1995 for the future years5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
4a)
In $ thousandsFor 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
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
AssetsCash $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
It can be seen here
it can be seen here
Exhibit 1 Financial Statements for Tire City, Inc.
Selling, general, and administrative expenses
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
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest ExpenseAccrued 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
4b)
In $ thousandsFor 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
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 SHEETIn $ thousands
For years ending 12/31 1993 1994 1995
AssetsCash $508 $609 $706 3%
Accounts receivable 2,545 3,095 3,652 16%
Inventories 1,630 1,838 2,190 9%
Current maturities of long-term debt
External financing need financed by Bank debt - (Line of credit)
Exhibit 1 Financial Statements for Tire City, Inc.
Selling, general, and administrative expenses
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
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest ExpenseAccrued 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 $8,983
Current maturities of long-term debt
External financing need financed by Bank debt - (Line of credit)
What will be the impact of on TCI's external funding requirements as of the end of 1996 if:
b) Accrued Expenses were to grow less than expected in the year 1996
a) If inventory was not reduced by the end of 1996 then the External Financing need for the year 1996 will be increased from 422870$ to $987870.
b) If the accrued expense were to grow less than expected in 1996, then the total of liabilities will be reduced and hence the external financing need required in 1996 and 1997 will be more.For Example: if we reduce accrued expenses ratio to sales to 4%, then the external financing need in 1996 increased to 1278230$ and in 1997 increased to 753540$
ANSWERS
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can.
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 it was coming around 10.xx%. So we are taking 10% to avoid fractional values
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
In $ thousands1996 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 10,758213 333
$75.00 $161.29 We are providing interest @ 10% on long term debt of 625000$ . Int is n2618.4 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 19951473.24 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 6,5631,941 2,2744,222 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 1,1355,056.11 6,400.666,191.11 7,535.66
11,640.58 13,716.90
987.87 15.66
In $ thousands1996 1997
growth in sales 28206 33847.2% of sales 16334.4 19,601
11871.6 14245.92
% of sales 8965.2 10,758213 333
$75.00 $190.322618.4 2964.357
% of sales 1145.16 1296.471473.24 1,668
as a % of PAT 297.12 336.38
In $ thousands1996 1997
% of sales 846.18 1015.416% of sales 4382.4 5,259% of sales 1625 3,154
External financing need financed by Bank debt - (Line of credit)
6853.58 9,428
6,163 6,5631,941 2,2744,222 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 $125 625 500
remains constant 1,135 1,1355,056.11 6,387.626,191.11 7,522.62
11,075.58 13,716.90
1,278.23 735.74External financing need financed by
Bank debt - (Line of credit)
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values
We are providing interest @ 10% on long term debt of 625000$ . Int is n
also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was
int @ 10% on the 1995 Ext Fin Need of 987870$ will be outstanding as it will be repaid in instalments from year 1998
Question 5What would be the impact on TCI's external funding requirements as of end of 1997 ifa) TCI depreciated more than 5% of the warehouse's total cost in 1997b)TCI experienced higher price inflation in its revenues and operating costs (but not in the costs of its warehouse expansion) than was originally anticipated in 1996 and 1997c) Days receivable were reduced to 45 days or days payables were increased to 45 days
Solutiona) If TCI Depreciated more than 5% of the warehouse total cost in 1997, then the external financing need will also reduce
Depreciated more than 5% ==>PAT for 1997 will be lesser ==> Retained earnings will be lesser ==> total liabilities will be lesser but not as less as assets due to tax effect on retined earnings ==> external funding need required will be lessExample: If Depreciation was increased fom 5% to 10% on warehouse total cost, then external financing need reduced to 545680$
b)TCI experienced higher price inflation in its revenues and operating costs for both the years then, external funding need required will be moreFor Example: the inflation is 10%, then all our growth percentage in sales will be from 20% to ((1+0.2)*(1+0.1)-1) % which is 32%the price inflation in sales which show its effect on operating costs as it is calculated as a percentage of saleshence our external funding requirement in th year 1996 will be increased to 444020$ and in 1997 will be increased to 1174470$
c) Days receivables were reduced to 45 days , or days payables were increased to 45 days1996 1997
old Days receivable 51.98461 51.9846 daysNew A/R is 3302.904 5043 ('000$)
656.63 ('000$)
842.04 ('000$)So when Days receivables were reduced, the External funding was nto required in 1996 instead we have to invest the surplus in marketable securitites
And in 1997 the external funding required increased to 842040$
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 , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can. So interest on the pulg for 1996 will be charged in the year 19973. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values4. We are assuming income tax rate of year 1995 for the future years5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
In $ thousandsFor 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%
Reasoning: Depreciated more than 5% ==> Total Assets will decrease
It can be seen here
It can be seen here
Surplus funds invested in Marketable securities
External financing need financed by Bank debt - (Line of credit)
It can be seen here
Exhibit 1 Financial Statements for Tire City, Inc.
Gross profit 6,800 8,457 9,893
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
AssetsCash $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
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest ExpenseAccrued 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
5 b)
In $ thousandsFor years ending 12/31 1993 1994 1995
Selling, general, and administrative expenses
Current maturities of long-term debt
External financing need financed by Bank debt - (Line of credit)
Exhibit 1 Financial Statements for Tire City, Inc.
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
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
AssetsCash $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
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest ExpenseAccrued 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
5 c)In $ thousands
For years ending 12/31 1993 1994 1995
Selling, general, and administrative expenses
Current maturities of long-term debt
External financing need financed by Bank debt - (Line of credit)
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
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
AssetsCash $508 $609 $706 3%
Marketable securities - plugAccounts 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
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest ExpenseAccrued 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 $8,983
Selling, general, and administrative expenses
Current maturities of long-term debt
Surplus funds invested in Marketable securities
External financing need financed by Bank debt - (Line of credit)
What would be the impact on TCI's external funding requirements as of end of 1997 if
b)TCI experienced higher price inflation in its revenues and operating costs (but not in the costs of its warehouse expansion) than was originally anticipated in 1996 and 1997c) Days receivable were reduced to 45 days or days payables were increased to 45 days
a) If TCI Depreciated more than 5% of the warehouse total cost in 1997, then the external financing need will also reduce
Depreciated more than 5% ==>PAT for 1997 will be lesser ==> Retained earnings will be lesser ==> total liabilities will be lesser but not as less as assets due to tax effect on retined earnings
Example: If Depreciation was increased fom 5% to 10% on warehouse total cost, then external financing need reduced to 545680$
b)TCI experienced higher price inflation in its revenues and operating costs for both the years then, external funding need required will be moreFor Example: the inflation is 10%, then all our growth percentage in sales will be from 20% to ((1+0.2)*(1+0.1)-1) % which is 32%the price inflation in sales which show its effect on operating costs as it is calculated as a percentage of saleshence our external funding requirement in th year 1996 will be increased to 444020$ and in 1997 will be increased to 1174470$
So when Days receivables were reduced, the External funding was nto required in 1996 instead we have to invest the surplus in marketable securitites
ANSWERS
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can.
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 it was coming around 10.xx%. So we are taking 10% to avoid fractional values
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
In $ thousands1996 1997
growth in sales 28206 33847.2% of sales 16334.4 19,601
11871.6 14245.92
% of sales 8965.2 10,758213 453 Depreciation rate is increased from 5% to 10%
$75.00 $104.79 only on warehouse expenditure2618.4 2929.893348
% of sales 1145.16 1281.401473.24 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 6,5631,941 2,3944,222 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 1,1355,056.11 6,372.146,191.11 7,507.14
11,075.58 13,596.90
422.87 545.68 this reduced from 611.78 thousand $ to 587.97 thousand $
In $ thousands1996 1997
External financing need financed by Bank debt - (Line of credit)
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 13,017213 333
$75.00 $106.90 We are providing interest @ 10% on long term debt of 625000$ . Int is n2909.04 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 19951636.76 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 6,5631,941 2,2744,222 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 1,1355,186.66 6,884.626,321.66 8,019.62
11,598.44 15,696.75
444.02 1,174.47 increase in external financing need due to increase in sales growth rate
In $ thousands
1996 1997
External financing need financed by Bank debt - (Line of credit)
growth in sales 28206 33847.2% of sales 16334.4 19,601
11871.6 14245.92
% of sales 8965.2 10,758213 333
$75.00 $62.502618.4 3092.18
% of sales 1145.16 1352.371473.24 1,740
as a % of PAT 297.12 350.89
% of sales 846.18 1015.416656.63
3302.90 5042.98 New A/R% of sales 1625 3,154
6430.71348 9,212
6,163 6,5631,941 2,2744,222 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 $125 625 500
remains constant 1,135 1,1355,056.11 6,445.046,191.11 7,580.04
10,652.71 13,501.00
656.63
842.04
Surplus funds invested in Marketable securities
External financing need financed by Bank debt - (Line of credit)
b)TCI experienced higher price inflation in its revenues and operating costs (but not in the costs of its warehouse expansion) than was originally anticipated in 1996 and 1997
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values
int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998
this reduced from 611.78 thousand $ to 587.97 thousand $
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
int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998
increase in external financing need due to increase in sales growth rate
Question 6Suppose the proposed terms of the bank credit included a covenant that limits TCI to keep a net working capital pf stleast 4$million as of end of each yearIs 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
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 , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can. So interest on the pulg for 1996 will be charged in the year 19973. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values4. We are assuming income tax rate of year 1995 for the future years5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
INCOME STATEMENT
In $ thousandsFor 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
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 $ thousandsFor years ending 12/31 1993 1994 1995
AssetsCash $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
See here for working
Exhibit 1 Financial Statements for Tire City, Inc.
Selling, general, and administrative expenses
Total assets $6,580 $7,822 $8,983
LIABILITIES
$125 $125 $125 constant - given
Bank Debt - plugAccounts payable 1,042 1,325 1,440 6%
Accrued interest ExpenseAccrued 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
Calculation of Net Working capitalIn $ thousands1996 1997
Cash 846.18 1015.42
Accounts receivable 4382.4 5258.88
Inventories 1625 3153.6
Total current assets 6853.58 9427.9
$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 $3,772 < 4000 TCI is not able to satisfy this covenant neither in year 1996 nor in year 1997
Current maturities of long-term debt
External financing need financed by Bank debt - (Line of credit)
Current maturities of long-term debt
Suppose the proposed terms of the bank credit included a covenant that limits TCI to keep a net working capital pf stleast 4$million as of end of each year
1. We are assuming the forecast rate as a % of forecasted sale for that year for all items except cash, inventory, Gross assets, Depreciation , interest, long term debt and current maturities
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 58% is assumed to be the forecasting rate for future years for COGS2. We are assuming that increase in Bank debt (plug) happens at the end of the year as the management is conservative and will take extra liability as late as it can.
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 it was coming around 10.xx%. So we are taking 10% to avoid fractional values
5. Interest on the external financing plug of 1995 will be provided in the year 1996 and it will be outstanding interest
INCOME STATEMENT
In $ thousands1996 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 10,758213 333
$75.00 $104.79 We are providing interest @ 10% on long term debt of 625000$ . Int is n2618.4 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 19951473.24 1,716
as a % of PAT 297.12 346.09
BALANCE SHEET
In $ thousands1996 1997
% of sales 846.18 1015.416% of sales 4382.4 5,259% of sales 1625 3,154
6853.58 9,428
6,163 6,5631,941 2,2744,222 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 $125 625 500
remains constant 1,135 1,1355,056.11 6,426.046,191.11 7,561.04
11,075.58 13,716.90
422.87 611.78
TCI is not able to satisfy this covenant neither in year 1996 nor in year 1997
External financing need financed by Bank debt - (Line of credit)
3. We are assuming the interest rate on the old Long term Debt also to be 10%. When we actually found out historical interest rate it was coming around 10.xx%. So we are taking 10% to avoid fractional values
We are providing interest @ 10% on long term debt of 625000$ . Int is n
also provided on the 1995's Ext Financing Need(Plug) of 422870$ as it was
int @ 10% on the 1995 Ext Fin Need of 422870$ will be outstanding as it will be repaid in instalments from year 1998
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