Clarkson Lumber Company Case Study Analysis

1157 words - 5 pages

PAGE PAGE 4 Case Analysis: Clarkson Lumber Company
Running head: Case Analysis: Clarkson Lumber CompanyCase Analysis: Clarkson Lumber CompanyFrank FoltynUniversity of Maryland University CollegeTMAN 625 section 9044September 10, 20071. Why has Clarkson Lumber borrowed increasing amounts despite its profitability? There are a couple of reasons for Mr. Clarkson wanting to increase the amount of borrowing that would be needed to continue with his operations. One of the reasons is that he wants to pay off Mr. Holtz in order for himself to become the primary owner of the company. Another reason for the need to borrow funds is that the net income was growing at a slower rate than the operating expenses. Between the years of 1993-1995 the net income only rose from 60k, 68k ,77k thousand respectively. The operating costs for the 3 years rose from 622k, 717k, 940k thousand respectively. Mr. Clarkson needs to take out a loan so he could increase the purchasing power for goods. This would be accomplished by Mr. Clarkson having liquid cash to use for prompt payment, which will lead to acquiring trade discounts and then Mr. Clarkson will have a competitive advantage in terms of buying power. 2. How has Mr. Clarkson met the financing needs in the past? The financing needs of the past have been met by taking a term loan of $399,000 that was fixed by the assets the company had. Mr. Clarkson had control liabilities that were offset by the increase in sales. 3. How much will Mr. Clarkson need to finance the expected expansion in sales to $5.5 million in 1996 and to take all trade discounts? Based on the pro forma balance sheet and the pro forma income statement, Mr. Clarkson would need $750,000 loan. This would be justified in terms of using the following formulas, which is derived from the 1996 Pro Forma Balance Sheet (figures are in thousands):Total Assets - Total Liabilities - Net Worth 2179 - 533 - 1395 = 251Following the 251 that would be needed to aide in reaching the goal of $5.5 million is $399,000 thousand to pay off the loan to Suburban Bank, which would bring the total needed to $650,000. Finally, Mr. Clarkson would be able to take out the remaining $100,000 that he needs to pay off Mr. Holtz, which brings the total to $750,000.4. What would you do as an advisor to Mr. Clarkson? What would you do as a banker who needs to approve the loans? As an advisor and a banker I would look at the past balance, income and expense sheets and see how the business operates. I would then find out where Mr. Clarkson would like to see the business in the next 5 years and create a future pro forma balance, income and expense sheet. With those facts and predictions in place, a person could then depict the best approach of reaching those goals. I would also look at the individual ratios such as return on sales (Net income / Sales), Return on Equity (Net Income / Last year's equity, Debt to Equity (Total Liabilities / Equity), Inventory Turnover (Cost of Sales / Inventory,...

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