Tire City Inc

Topics: Financial ratios, Financial ratio, Ratio Pages: 3 (1023 words) Published: February 25, 2011
Tire City, Inc. (TCI) is a rising distributor of automotive tires in northeastern United States. Their distribution centers arelocated throughout eastern Massachusetts. Their tires are sold as on-demand bases with chain of 10 shops located all throughout eastern Massachusetts with a central warehouse outside Massachusetts. Due to this proximity of warehouse, TCI stores enjoyed just-in-time delivery with only 24 hours of lag time. Tire City, Inc. sales have grown at compounded annual rate in excess of 20%, in past three years. And TCI’s Chief Financial Officer, Mr. Jack Martin predicts this consistency in sales growth going forward. Therefore, to accommodate the future growth Mr. Martin has decided to expand its warehouse facilities. However, there are few hurdles that require overcoming before Mr. Martin can continue with his growth plans. A long term debt of $2,400,000 would need to be borrowed at 10% interest rate per year from a former Tire City’s investor/lender, Mid Bank. However, the loan terms and conditions required it to be taken as-needed basis, in two separate parts: $ 2Million in 1996 and the rest $400,000 in 1997. TCI had borrowed funds from MidBank in 1991 to build a warehouse. The balance due on this loan was $875,000 at the end of 1995. TCI also established a line of credit at MidBank in 1991. Till 1995, TCI had not borrowed any money under this credit arrangement. Consequently, the inventories need to be cut down by more than $ 500,000 due to the disruption caused by warehouse expansion project. Keeping these conditions intact Mr. Martin need to prepare Tire City’s pro forma statement. Mr. Martin has hired DPK consultants to assist him with the forecasting of upcoming years income statement and balance sheet. Below are their suggestions and attached financial statements. Solution 1

As we can see from the ratio analysis (Appendix I) of Tire City, its financial health is quiet good as of 1995. All the liquidity ratios either shows an upward...
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