1. 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 – , ( 5% of 2400)‏

2. 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,
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

3. 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

4. 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

5. 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

6. 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

7. 1.

8. 2.

9. 2.

10. 3.

11. 3b.

12. 3.

13. 3.

14. 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.