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 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. 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 years ending 12/31 1993 1994 1995 1996 1997 INCOME STATEMENT Net sales $16,230 $20,355 $23,505 Cost of sales 9,430 11,898 13,612 Gross profit 6,800 8,457 9,893 Selling, general, and administrative expenses 5,195 6,352 7,471 Depreciation 160 180 213 Net interest expense 119 106 94 Pre-tax income 1,326 1,819 2,115 Income taxes 546 822 925 Net income $780 $997 $1,190 Dividends $155 $200 $240 BALANCE SHEET Assets Cash $508 $609 $706 Accounts receivable 2,545 3,095 3,652 Inventories 1,630 1,838 2,190 Total current assets 4,683 5,542 6,548 Gross plant & equipment 3,232 3,795 4,163 Accumulated depreciation 1,335 1,515 1,728 Net plant & equipment 1,897 2,280 2,435 Total assets $6,580 $7,822 $8,983 LIABILITIES Current maturities of long-term debt $125 $125 $125 Accounts payable 1,042 1,325 1,440 Accrued expenses 1,145 1,432 1,653 Total current liabilities 2,312 2,882 3,218 Long-term debt 1,000 875 750 Common stock 1,135 1,135 1,135 Retained earnings 2,133 2,930 3,880 Total shareholders equity 3,268 4,065 5,015 Total liabilities $6,580 $7,822 $8,983

Horizontal analysis (index numbers) of income statements and balance sheets. This analysis shows the growth in each item on the income statement and balance sheet. For example, sales for 1993 would be equal to 1.00. Sales for 1994 would be $20,355,000 / $16,230,000 = 1.25. Sales for 1995 would be $23,505,000 / $16,230,000 = 1.45 and so on. Similarly, cash for 1993 would be 1.00. Cash for 1994 would be $609,000 / $508,000 = 1.20.