Tire City Case

Tire City, Inc.

1. Evaluate Tire City’s financial health. How well is the company performing?

2. Based on Mr. Martin’s prediction for 1996 sales of $28,206,000, and for 1997 sales of $33,847,000 and relying on the other assumptions provided in the Tire City case, prepare complete pro forma forecasts of TCI’s 1996 and 1997 income statements and year-end balance sheets. As a preliminary assumption, assume any new financing required will be in the form of bank debt. Assume all debt (i.e., existing debt and any new bank debt) bears interest at the same rate of 10%.

3. Using your set of pro forma forecasts, assess future financial health of Tire City as of the end of 1997. Will Tire City be in a stronger or weaker financial condition two years from now?

4. What would be the impact on TCI’s external funding needs as of the end of 1996 if inventory were not reduced by the end of 1996?

5. Suppose the proposed terms of the bank credit included a covenant (a contractual obligation that bids a borrower to specific actions or outcomes as a condition for extending a loan) that read as follows: “The company must maintain net working capital (defined for purposes of this loan as accounts receivable plus inventories minus accounts payable) of at least $4 million. For purposes of this covenant, net working capital will be measured at the end of each fiscal year.” Is TCI likely to be able to satisfy this covenant in both 1996 and 1997?

As a lender, would you be willing to loan TCI the funds needed to expand its warehouse facilities and finance its growth? Why or why not?