Tire City

Topics: Inventory, Balance sheet, Interest Pages: 3 (1003 words) Published: September 22, 2008
Tire City

After completing the forecast for Tire City for 1996 and 1997 you can see that the firm is in very good shape. As the Sales increase each year the expenses do not increase at the same level so the net income of the firm continues to increase. With this number increasing the firm will be able to cover the loan for the new building without having to raise too much capital outside. The amount that tire city is expected to spend is $2,400,000 which $2,000,000 of that is accounted for in 1996 and is put into Long term debt and Gross Plant and Equipment. While the remaining $400,000 will be accounted for in 1997. After adding this data along with the increases to sales data we can see that in 1996 to firm will have excess cash in 1996 of 1,505,000 and excess cash of $1,214,000 in 1997. So with looking at this information Tire City should take out the loan because they have the funds to pay it back and they have the line of credit with the bank that will make it cheaper for them. Since they have such an excess in cash they will not only be able to pay off this loan easily but they will be able to pay off the excess on the previous loan easily too. By going with the loan the net income of the company will not go down by a whole lot because the only account that will bring it down will be interest expense. If they were to use the funds that the company had already accrued then they would not be able to give off as much in dividends and that may make the stockholder unhappy. While if they get the loan they will have more in excess and may be able to give off more in dividends which will make the stockholders happier and may even turn more people into wanting to buy the stock of tire city. One thing that does need to be done is that they need to manage their inventory a little better. In 1996 the inventory levels went down because they were unable to manage it between the two warehouses but in 1997 it went back up to its normal level....
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