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Tire City Case Study

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Tire City Case Study
Summary of Facts Tire City Inc, a retail distributor of automotive tires, has had a significant increase in sales for the past three years. Sales had grown at a compound annual rate in excess of 20% as a reflection of excellent service and customer satisfaction. In order to keep up with this growth in sales, Tire City has decided to expand its warehouse facilities to accommodate future growth, maintain great service, keep competitive pricing, and to continue yielding high levels of customer satisfaction. Through previous business with MidBank, TCI has established a good line of credit with them. In 1991, TCI took out a loan from MidBank to build a warehouse. This loan was being repaid in equal annual payments of $125,000, leaving a remaining balance of $875,000 at the end of 1995. In order to expand its warehouse facilities and utilize this line of credit, TCI plans to invest $2,400,000 on this expansion; $2,000,000 to be spent during 1996, the remaining to be used in 1997 as needed, fulfilling the company’s anticipated needs for the next several years.
Issues
Due to the fact that Tire City already has an outstanding loan that is still in the process of being paid off, the main issue arises. Already bearing financial obligations towards MidBank, as well as other everyday business obligations, can Tire City afford to expand? If so, how much can be internally financed? How much external financing will Tire City need in the form of a bank loan from MidBank? Lastly, can Tire City reduce their inventory and still function properly?
Analysis
TCI’s future financials look fairly stable for the most part. Using management’s projections, a growing TCI is revealed with great sales growth and stable ratios.1 The management case reveals slight decreases in Current and Quick ratios as well as slight increases in Total Liability to Total Assets and Total Liability to Equity do to the increase in Bank Loans Payable from the forecasted loan for the warehouse.2 Accounts
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