Tire City Case Study Essay

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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 …show more content…
This could cause serious issues physically for construction, but lets take a look at the financial effects. If inventory was to continue the historical pattern from previous years, inventory in 1996 would be increased by 10% from 1995, and inventory for year ended 1997 would be a 10% increase from 1996 as seen in Exhibit 8. Taking a look at exhibit one, you can see the two inventory numbers highlighted in yellow. While pushing forward through the financials and comparing the total assets to total liabilities and shareholder’s equity, Tire City’s need for a bank loan increases drastically. In order to make ends meet Tire City is looking at needing a loan worth $2,864,000 for 1996 and 1997 combined as seen in Exhibit 8. This loan amount is a big difference from our two previous scenarios. At this point in time, Tire city does have the inventory itself to pledge as collateral and plenty of accounts receivable as well, but at MidBank we would classify these outcomes as a highly risky loan situation. We have to assume that the worst possible outcome could possibly happen, and if inventory could not be minimized, Tire City would need way more money than MidBank would be comfortable with loaning at this point in time. The amount of external financing needed could also be affected by an increased depreciation expense on the new warehouse. In the managerial case, for every 1% increase in depreciation on the warehouse in 1997, a $10.6 average
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