Tire City Case • Pro forma income statements and balance sheets for 1996 & 1997 • 1/2 page–– project the need for financing for the warehouse project determined by the projected cash flows; – assess the financial health of Tire City before and after the project is completed • General methodology for producing a forecast –average % of sales approach – Sales grow at 20% compounded – Cost of sales, S G & A–average for past three years –96, use same for 97 – Depreciation–96-213, 97-213+( 5% of 2400)
Tire City CasePro forma income statements and balance sheets for
1996 & 19971/2 page project the need for financing for the
warehouse project determined by the projected cash flows; assess
the financial health of Tire City before and after the project is
completedGeneral methodology for producing a forecast average % of
sales approachSales grow at 20% compoundedCost of sales, S G &
A average for past three years 96, use same for 97Depreciation
96-213, 97-213+( 5% of 2400)
Net interest expense 96-129, 97-116Income tax 45%Dividends 20%
of PATCash 3% of salesA/R 15% of salesInventories 96-given,
97-3148Gross plant and equipment 96-given, 97-givenAccumulated
depreciation from income statementCurrent liabilities constantA/P
6% of salesBank debt - plug figure to balanceAccrued expenses 7% of
salesLong term debt decline by 125Common stock constantRetained
earnings beg RE +PAT-dividends
Ratios 95, 96, 97ProfitabilityReturn on assetsGross marginReturn
on equityLiquidityCurrent ratioQuick ratioLeverageDebt to
assetsDebt to equityTimes interest earnedActivitySales/assetsDays
receivableDays inventoryDays payable
Financial Statements - ForecastSystematic projection expected
actions of management budgets, schedules, financial
statementsWorking plan statistics, ratios, relationships, funds
flows, conditions, decisions, activitiesCoordinated thinking
futureReduces emergency decisions, surprisesSets standards of
performance measure, controlAnticipate upcoming financial needsPro
Forma statements - future
Pro forma operating statementSalesTrend growth in sales%
increase in number of storesInflation rateSales per square
footSales per employeeAssumptions estimates best guessHistorical
relationshipsManagement forecastsIndustry dataCommon senseCOGS
percentage of salesOther items less challenge past ratio
Financial Statements - ForecastIncome statement project other
itemsClassify cost behavior assumptions vary with
sales?Depreciation new assetsInterest new debtTaxes rates
changePercentage of salesTest assumptions constant with
sales?Special casesInterest - % of total financial
liabilitiesAdding new L/T assets cost per store?Tax rate projected
EBTClassification of debt current vs. L/T
1.
2.
2.
3.
3b.
3.
3.
Read Note on Financial Forecasting; Read Financial Forecasting
Problems; Assign #10 - Tire City Case (due 3/10, 3/11)Extra credit
cash flows from operations '96 and '97.
