Use historical financial statements for the years 1993, 1994, and 1995 to develop pro forma financial statements for the company (both an income statement and a balance sheet). As outlined in the case, your firm projects a 20% increase in sales for 1996 and 1997.
For the ended in 1995, Tire City had sales of $23,505,000.00. Net income for that period was $1,190,000.00. During the previous 3 years, sales had grown at a compound annual rate in excess of 20%.
In 1991, Tire City had borrowed from Mid-Bank to build a warehouse. This loan was being repaid in equal annual installments of $125,000.00. At the end of 1995, the balance due on the loan was $875,000.00. Also, in 1991 Tire City established a line of credit at Mid Bank. The company had not yet borrowed any money under this credit arrangement.
Tire City decided to expand its warehouse facilities. During the next 18 months, Tire City planned to invest $2,400,000.00 in the expansion, $2,000,000.00 of which would be spent during 1996 (no other capital expenditures would be spent in 1997 and 1997). The expansion project will be completed in 1997.
Therefore no depreciation could be deducted in 1996. However, Tire City was told they could depreciate the warehouse by 5% of the total cost in 1997. Total depreciation expense on its other assets in 1996 and 1997 would be the same as it was in 1995.
During the construction of the warehouse, inventories would drop to a level of $1,625,000.00 by the end of 1996, much lower than the $2,190,000.00 shown at the end of 1995. However, this temporary drop would only last until the end of 1997 where inventory would raise back to the same proportional relationship to sales that it had in 1995.
Cash balances would be maintained at a level of 3% of sale during the next 2 years. Although the federal marginal corporate tax rate was 35%, the average tax rate on Tire City pre-taxed income had typically been higher than this due to misc. local taxes. Future taxation was expected to continue in future at rates consistent with the most recent past experiences. Dividend payouts will remain the same in the foreseeable future.
The construction loan from Mid-Bank will be drawn in two separate parts. One in 1996 and one in 1997. The loan would be repaid in 4 equal annual installments. The first installment payment would take place one year after construction of the warehouse was completed (1998). The interest rate is set at 10% per year.
In preparation for this loan, we are creating a pro forma and projecting a 20% increase in sales each year in 1996 and 1997 from $23,505,000 to $28,206,000 and 33,847,000.
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For years ending 12/31
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1993
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1994
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1995
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1996
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1997
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INCOME STATEMENT
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Net sales
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$16,230
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$20,355
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$23,505
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28,206
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33,847
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Cost of sales
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9,430
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11,898
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13,612
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16,224
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19,601
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Gross profit
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6,800
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8,457
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9,893
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11,872
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14,246
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Selling, general, and administrative expenses
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5,195
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6,352
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7,471
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8,965
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10,758
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Depreciation
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160
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180
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213
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256
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307
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Net interest expense
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119
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106
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94
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113
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135
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Pre-tax income
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1,326
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1,819
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2,115
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2,538
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3,046
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Income taxes
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546
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822
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925
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1,110
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1,332
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Net income
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$780
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$997
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$1,190
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1,428
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1,714
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Dividends
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$155
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$200
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$240
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288
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346
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BALANCE SHEET
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Assets
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Cash
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$508
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$609
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$706
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Accounts receivable
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2,545
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3,095
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3,652
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Inventories
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1,630
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1,838
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2,190
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Total current assets
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4,683
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5,542
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6,548
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Gross plant & equipment
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3,232
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3,795
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4,163
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Accumulated depreciation
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1,335
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1,515
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1,728
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Net plant & equipment
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1,897
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2,280
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2,435
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Total assets
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$6,580
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$7,822
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$8,983
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LIABILITIES
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Current maturities of
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$125
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$125
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$125
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long-term debt
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|
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Accounts payable
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1,042
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1,325
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1,440
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Accrued expenses
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1,145
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1,432
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1,653
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Total current liabilities
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2,312
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2,882
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3,218
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Long-term debt
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1,000
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875
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750
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Common stock
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1,135
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1,135
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1,135
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Retained earnings
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2,133
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2,930
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3,880
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Total shareholders' equity
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3,268
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4,065
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5,015
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Total liabilities
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$6,580
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$7,822
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$8,983
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