Teaching Purpose: "To introduce percent-of-sales forecasting techniques in a relatively simple business setting."

Before You Begin This Case: Before starting on this case, you should read the following material listed for Week 5 of your syllabus.
where Ross, Westerfield, and Jordan (RWJ), Benninga and Sarig (BS)
 

Financial Statements, Taxes, and Cash Flow, Chapter 2, RWJ Working with Financial Statements, Chapter 3, RWJ Long Term Financial Planning and Growth, Chapter 4, RWJ Using Financial Reporting Information, Chapter 2, BS Building Pro-Forma Financial Statements, Chapter 4, BS Analyzing the Firm's Operations, Chapter 6, BS J.M. Smucker: Projecting Financial Performance, Chapter 7, BS Financial Modeling (using Excel), page 80-134, Liu. Pay particular attention to how we can use Excel to reconcile the interest expense in the income statement with the amount of debt on the balance sheet.

Assignment: After reading the Tire City case, you should

• Present Condition of the Firm: Do a profile of Tire City's financial health by calculating the following ratios from 1993 through 1995

• Short Term Solvency or Liquidity: current ratio, quick ratio
• Long Term Solvency: equity multiplier, total debt ratio, interest coverage ratio
• Asset Management: total asset turnover
• Profitability: profit margin, return on assets (ROA), return on equity (ROE),


Discuss how effective Tire City's management is in managing growth. Is the company profitable and financially healthy?
 

• Anticipated Condition of the Firm (Facing the Future):

• Do a pro-forma (forecasted) income statement and balance sheet for Tire City for the years 1996 and 1997 (this is given at the bottom of page 2) using the percentage of sales technique
• Calculate the preceding ratios for 1997 and compare them to 1995. What kind of financial health will Tire City be in at the end of 1997? How much extermal financing does Tire City require? Would you lend Tire City the necessary financing?