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Good Week Tires Inc Case Study Solutions

 

3.0 CASE ASSUMPTIONS AND ESTIMATION OF CASH FLOW

The calculations of various components of the cash flows and basic assumptions are given below:

3.1 Equipment Cost:

Goodweek has invested $120,000,000 initially in the productionequipment for making the SuperTread.

3.2 Depreciation Cost

: Modified Accelerated Cost Recovery (MACRS) method has been used in calculating the deprecation. The calculation is shown as below:

Year

MACRS %DepreciationEnding Book Value

10.143$17,160,000$102,840,00020.245$29,400,000$73,440,00030.175$21,000,000$52,440,00040.125$15,000,000$37,440,00050.089$10,680,000$26,760,00060.089$10,680,000$16,080,00070.089$10,680,000$5,400,00080.045$5,400,000$0

3.3 Revenues and Variable Cost:

SuperTread has two distinct markets. These are theOriginal Equipment Manufacturer (OEM) market and the replacement market. Theselling prices of the tire are $36 and $59 respectively in OEM and replacement market.For both the market, the variable cost is $18. Both selling price and the variable cost willincrease at the rate of 4.25% (1% above the inflation rate).There will be 2 million newcars in the market. This will grow at the rate of 2.5% in the subsequent years. It isassumed that, SuperTread will capture 11% of the OEM market at the first year. It is alsoestimated that, the replacement market size will be 14 million in the first year. This willgrow at the rate of 2% at the subsequent years. It is expected that, SuperTread willcapture 8% of the replacement market at the first year. The detail calculation of revenueand expenditure for the two markets is shown below:

3.3.1 OEM Market

Tire City Inc. Case Study

1278 WordsApr 19th, 20156 Pages

RATIO | 1993 | 1994 | 1995 | Profitability | Gr. Profit Margin | 41.90% | 41.55% | 42.09% | Pretax Margin | 8.17% | 8.94% | 9.00% | Net Margin | 4.81% | 4.90% | 5.06% | Ret. On Assets | 11.85% | 12,75% | 13.25% | Ret. On Capital | 18.28% | 20.18% | 20.64% | Ret. On Equity | 23.87% | 24.53% | 23.72% | Activity ratio | Total asset turnover | 2.47x | 2.60x | 2.62x | Inventory turnover | 9.96x | 11.07x | 10.73x | Receivable turnover | 6.38x | 6.58x | 6.44x | Days Receivable | 57.24 | 55.50 | 56.71 | Days Inventory | 63.09 | 56.39 | 58.72 | Days Payable | | 39.95 | 37.64 | Purchases | | 12,106 | 13,964 | Liquidity | Current Ratio | 2.03x | 1.92x | 2.03x | Quick Ratio | 1.32x | 1.29x | 1.35x | Leverage |…show more content…

At the same time, since PP&E increased, D,D &A had a same trend. As for Working Capital, As Current assets rose more than Current liabilities. The number increased. Also, Net Free Cash Flow cannot be ignored because it showed negative number in 1995, and NFCF is a crucial component to calculate stock price. | 1993 | 1994 | 1995 | Average | COGS to Sales | 58.10% | 58.45% | 57.91% | 58.16% | SGA to Sales | 32.01% | 31.21% | 31.78% | 31.67% | Income Taxes to Pre Tax Income | 41.18% | 45.19% | 43.74% | 43.37% | PAT paid as Dividends | 19.87% | 20.06% | 20.17% | 20.03% | Cash to Sales | 3.13% | 2.99% | 3.00% | 3.04% | Account to Sales | 15.68% | 15.21% | 15.54% | 15.47% |
These number will be used for predicting future financial statements later in this case study. Auto parts Industry Statistics | Market Capitalization | $21 billion | Price / Earnings | 16.10 | Price / Book | 3.00 | Net Profit Margin (mrq) | 4.30% | Price To Free Cash Flow (mrq) | 22.00 | Return on Equity | 16.00% | Total Debt / Equity | 25.90 | Dividend Yield | 1.60% |
Source; http://biz.yahoo.com/ic/738.html
Tire City’s Net Margin and ROE exceeds the industry average. In Thousands of Dollars | INCOME STATEMENT | 1996 | 1997 | ASSUMPTIONS | | | | | Net Sales | 28,206

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