Tire City Case Pro forma income statements and balance sheets for 1996 & 1997 1/2 page – project the need for financing for the warehouse project determined by the projected cash flows; assess the financial health of Tire City before and after the project is completed General methodology for producing a forecast – average % of sales approach Sales grow at 20% compounded Cost of sales, S G & A – average for past three years – 96, use same for 97 Depreciation – 96-213, 97-213+( 5% of 2400)‏

Net interest expense – 96-129, 97-116 Income tax – 45% Dividends – 20% of PAT Cash – 3% of sales A/R – 15% of sales Inventories – 96-given, 97-3148 Gross plant and equipment – 96-given, 97-given Accumulated depreciation – from income statement Current liabilities – constant A/P – 6% of sales Bank debt - plug figure to balance Accrued expenses – 7% of sales Long term debt – decline by 125 Common stock – constant Retained earnings – beg RE +PAT-dividends

Ratios – 95, 96, 97 Profitability Liquidity Leverage Activity Return on assets Gross margin Return on equity Liquidity Current ratio Quick ratio Leverage Debt to assets Debt to equity Times interest earned Activity Sales/assets Days receivable Days inventory Days payable

Financial Statements - Forecast Systematic projection – expected actions of management – budgets, schedules, financial statements Working plan – statistics, ratios, relationships, funds flows, conditions, decisions, activities Coordinated thinking – future Reduces emergency decisions, surprises Sets standards of performance – measure, control Anticipate upcoming financial needs Pro Forma statements - future

Pro forma operating statement Sales Trend – growth in sales % increase in number of stores Inflation rate Sales per square foot Sales per employee Assumptions – estimates – best guess Historical relationships Management forecasts Industry data Common sense COGS – percentage of sales Other items – less challenge – past ratio

Financial Statements - Forecast Income statement – project other items Classify cost behavior – assumptions – vary with sales? Depreciation – new assets Interest – new debt Taxes – rates change Percentage of sales Test assumptions – constant with sales? Special cases Interest - % of total financial liabilities Adding new L/T assets – cost per store? Tax rate – projected EBT Classification of debt – current vs. L/T

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Read Note on Financial Forecasting; Read Financial Forecasting Problems; Assign #10 - Tire City Case (due 3/10, 3/11) Extra credit – cash flows from operations – '96 and '97.