Tire City Inc
Tire City Incorporated
Tire City, Inc. is a rapidly growing retail distributor of automotive tires. Although they have 10 shops located throughout the Northeast region, the bulk of TCI’s inventory is managed at a central warehouse. During the last three years, sales have been growing at a compound annual rate in excess of 20%. With such a great reflection of their excellent service and customer satisfaction in their net income, TCI’s central warehouse is “bulging at the seams”. TCI has decided to expand its warehouse facilities to accommodate future growth, and has requested a five year loan. We, MidBank, previously financed a project for TCI in 1991, which is currently being repaid in equal annual installments. TCI plans to invest $2,400,000 on its expansion, $2,000,000 to be spent in 1996.
In order to establish whether or not Tire City, Inc. will be a reliable debtor, and to determine appropriate loan amounts in 1996 and 1997, we produced pro forma financial statements given Mr. Martin’s projection of 20% annual increases in sales, as well as more conservative projections of 15% and 10%.
Income Statement
See Appendices 1 (A-C) to view the pro forma Income Statements.
In order to achieve an accurate projection of Net Income, we had to make a number of assumptions about the behavior of various accounts. We assumed Net Sales would grow by 20%, 15%, and 10% in 1A, 1B, and 1C, respectively. Based on prior years’ data, we assumed Cost of Sales would remain at 58% of Net Sales. We also assumed Selling, General, and Administrative Expenses would grow at 20%, 15%, and 10%, respectively. TCI will not be allowed to deduct any depreciation on the new building in 1996, but will be able to deduct 5% of the warehouse’s total cost of $2,400,000 in 1997.
Depreciation Expense on all other assets held by TCI will remain the same in 1996 and 1997 as it was in 1995. We assumed Net Interest Expense would remain at the average percentage of Long-Term Debt as it had in
Tire City, Inc. is a rapidly growing retail distributor of automotive tires. Although they have 10 shops located throughout the Northeast region, the bulk of TCI’s inventory is managed at a central warehouse. During the last three years, sales have been growing at a compound annual rate in excess of 20%. With such a great reflection of their excellent service and customer satisfaction in their net income, TCI’s central warehouse is “bulging at the seams”. TCI has decided to expand its warehouse facilities to accommodate future growth, and has requested a five year loan. We, MidBank, previously financed a project for TCI in 1991, which is currently being repaid in equal annual installments. TCI plans to invest $2,400,000 on its expansion, $2,000,000 to be spent in 1996.
In order to establish whether or not Tire City, Inc. will be a reliable debtor, and to determine appropriate loan amounts in 1996 and 1997, we produced pro forma financial statements given Mr. Martin’s projection of 20% annual increases in sales, as well as more conservative projections of 15% and 10%.
Income Statement
See Appendices 1 (A-C) to view the pro forma Income Statements.
In order to achieve an accurate projection of Net Income, we had to make a number of assumptions about the behavior of various accounts. We assumed Net Sales would grow by 20%, 15%, and 10% in 1A, 1B, and 1C, respectively. Based on prior years’ data, we assumed Cost of Sales would remain at 58% of Net Sales. We also assumed Selling, General, and Administrative Expenses would grow at 20%, 15%, and 10%, respectively. TCI will not be allowed to deduct any depreciation on the new building in 1996, but will be able to deduct 5% of the warehouse’s total cost of $2,400,000 in 1997.
Depreciation Expense on all other assets held by TCI will remain the same in 1996 and 1997 as it was in 1995. We assumed Net Interest Expense would remain at the average percentage of Long-Term Debt as it had in