Butler Lumber Finance Case

  • Length: 1363 words (3.9 double-spaced pages)
  • Rating: Excellent
Open Document

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Text Preview

More ↓

Continue reading...

Open Document

Statement of firm’s position
Butler Lumber Company is looking for more cash due to a fast-paced lumber market and a shortage of funding. Their regular bank, Suburban National Bank, is not willing to expand their exiting loan to an amount greater than $250,000 without securing the loan with real property. Another loan is being offered by a second bank, Northrup National Bank, for $465,000, with the understanding that the previous loan would be rolled into the second. The interest on the new loan would be prime + 2%.
The co-founder, Mark Butler, owes a major note to the other original partner, who Mark bought out. He has a mortgage on his 12-year-old house and no other significant investments. Mark’s personal references indicate that he is hard-working and watches his business very closely.
Mark’s current outstanding debts are as follows:

Bank note for $247,000
Outstanding debt from trade partners $157,000
Accounts payable $343,000
Accrued expenses $51,000
Current portion of long-term debt $7,000
Long-term debt $43,000

Total liabilities $848,000

Net income is projected at $56,000 based on projected sales of $3.6m. Butler’s business relies more heavily on the repair industry than on new construction, so it is somewhat protected against market fluctuations on new construction.

Major recommendations
Northrup National Bank should extend the loan to Butler. The company will roll much of its existing debt into the new loan, without extending itself significantly further than it currently is, and at a more favorable rate. Butler has been successful in keeping current on its debts, and based on projections should have the means to start paying these debts down. From the bank’s perspective, there’s little risk involved. With the industry expected to grow so much in the next year, Butler will be in a strong position, and potentially interested in borrowing more at the end of 1991.
Butler Lumber Co. should take the short term loan and if necessary roll the $157,000 trade credit into it.

Nature of the problem
Butler’s short-term loan options are completely maxed out, so the company has no cash flexibility. Inventory levels indicate Mark is ramping up in expectation of the massive influx of sales in the warmer months. More of Butler’s sales are in the warm months, when repairs are easier to make in the Inland Northwest. The loan will give Butler the ability to finance more inventory to meet the expected growth in sales.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

How to Cite this Page

MLA Citation:
"Butler Lumber Finance Case." 123HelpMe.com. 24 Jun 2018
Title Length Color Rating  
Butler Lumber Company Considers a New Line of Credit Essay - ... This amount would The company’s revenue stream had increased substantially over the 2 year period; net sales had increased by 18.62% in 1989, 33.8% in 1990, and the company has already accumulated 26.65% of the revenue it had in 1990 in the first quarter while the company obtains approximately 55% of its revenue in the six month period from April to September (based off of historical average). Fortunately, the company has been able to maintain low operating expenses, which is good for a company involving repair work involving moldings, sash, and door products....   [tags: bank, expenses, financial] 540 words
(1.5 pages)
Strong Essays [preview]
Medical Technology Company Finance Case Essay - 1. What specific items of capital should be included in the SIVMED’s WACC. Should before-tax or after-tax values be included. Should historical or new values be used. Why. Answer: WACC covers computation of SIVMED’s cost of capital in which each category of capital is proportionately weighted. All capital basis - common stock, preferred stock, bonds or any other long-term borrowings – should be listed under SIVMED’s WACC. We determine WACC by multiplying the cost of the corresponding capital component by its proportional weight and then adding: where: Re is a cost of equity Rd is a cost of debt E is a market value of the firm's equity D is a market value of the firm's debt V equals E + D E/V...   [tags: Business Finance] 1992 words
(5.7 pages)
Powerful Essays [preview]
Essay on Butler´s Characterization Shori - “How could it feel so good when it should be disgusting and painful?” (Butler 75) These words spoken by Theodora, an elderly white woman, about her symbiotic and sometimes sexual relationship with Shori, a black “elfin little girl” (Butler 75), express a societal fear that Octavia Butler exposes in her characterization of Shori as a monster. Jeffrey Jerome Cohen asserts in his “Seven Thesis of Monster Culture” that monsters” reevaluate our cultural assumptions about race, gender, and sexuality our perception of difference, and our tolerance toward its expression.” (Cohen) Shori is a monster because her very existence testifies to the blurring of historically concrete lines of difference....   [tags: Octavia Butler, societal fear, obscurity] 1113 words
(3.2 pages)
Strong Essays [preview]
A Case Study of the International Finance Corporation in Nigeria Essay - IFC Mission- ‘To promote sustainable private sector investment in developing countries.’ “The World Bank’s role, in my opinion, is to help improve the business environment in the developing countries so that the private sector can drive growth.”- Mr. Peter Woicke, Executive Vice President of the World Bank Group (WBG) in charge of the International Finance Corporation (IFC) - Lagos, August 2004. At the time Mr. Woicke was speaking, IFC involvement in Nigeria had reached $200million in investment commitments, a figure quickly surpassed in less than a year from that date (as at June 2005, IFC investment in Nigeria was to the tune of $290million)....   [tags: Economics Business Case Study Essays] 4147 words
(11.8 pages)
Strong Essays [preview]
Home Depot Finance Case Essay - II. Background Information The Home Depot Inc. was founded in 1978 and is the world’s largest home improvement retailer and the second largest retailer in the United States. The sales for the fiscal year 2000 were $45.7 billion, compared to $38.4 billion in fiscal 1999. As of January 2001, the company was operating 1,134 retail stores in forty-seven states, six Canadian provinces, Puerto Rico, Chile and Argentina. Home Depot stores sell a wide assortment of building materials, home improvement and garden products....   [tags: Business Case Study] 1220 words
(3.5 pages)
Good Essays [preview]
Essay about Clarkson Lumber - MEMO RE CLARKSON LUMBER TO: John Doe President, Northrup National Bank FROM: George Dodge Loans Officer, Northrup National Bank Clarkson Lumber Company is owned and operated by the hardworking, 49-year-old Mr. Clarkson. It has low operating expenses, a small staff, and strong management. The overall impression is one of a conservative, efficient operation. Clarkson himself leads a frugal lifestyle with little personal debt. Clarkson Lumber is a company experiencing rapid growth but with a constant cash flow crisis....   [tags: Business Analysis Letter Executive] 931 words
(2.7 pages)
Strong Essays [preview]
Mariott Corporation Finance Case Study Essay - Marriott's corporation: the cost of capital What is the weighted average cost of capital for Marriott Corporation. Are the four components of Marriott's financial strategy consistent with its growth objective. Marriott Corporation is an international company who's the growth over the year has been more than satisfactory. In 1987, Marriott's sales grew up by 24% and its return on equity stood at 22%. Moreover the sales and earnings pr share has doubled over the previous year. The company operates in three divisions: lodging, contract services and restaurants which represents 41%, 46% and 13% of sales in 1987 respectively....   [tags: Business Case Study] 1731 words
(4.9 pages)
Strong Essays [preview]
Essay about Clarkson Lumber Company - Mr. George Dodge, Clarkson Lumber Company is doing well but there is the issue of whether or not there is too high a risk in granting the request for the $750,000 line of credit. There are many supporting strong points but it also has some problems to work out. This is a company that has many good characteristics and looks promising but needs the extra money to pay off loans, inventory, and supplies. I recommend this company to receive the line of credit. Looking at the individual ratios seen in exhibit 1 and comparing it to the industry average shown in exhibit 2 gives a sense of where this company stands....   [tags: Business Analysis Finance] 1794 words
(5.1 pages)
Strong Essays [preview]
Basic Finance Essay - Basic Finance The main purpose of studying finance is to gain an understanding of the financial performance of a company, corporation or industry. By looking at a company's financial performance, decisions can be made about many things by many different players. Corporations are rated by different agencies that examine financial records and potential for growth. Fitch ratings are a good example of this. My employer has an A++ Fitch rating. This high rating allows a non-profit company to borrow money at lower interest rates....   [tags: Business Finance Analysis] 878 words
(2.5 pages)
Strong Essays [preview]
Essay on Finance - Finance Wikipedia's accurate definition of finance is "The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their financial affairs, particularly the differences between income and expenditure and the risks of their investments" http://en.wikipedia.org/wiki/Finance. I discuss the importance of keeping track and updating financial reports as well as simple bank statements. These are just some of the essentials that I believe we all as a people should acknowledge....   [tags: Business Finance] 1805 words
(5.2 pages)
Powerful Essays [preview]

Why does Mr. Butler have to borrow money to support his profitable business? Theoretically, according to the balance sheet, no additional funding is necessary to meet the growth in sales in 1991. In fact, the balance sheet shows that Mark can pay down his debt by $33,000. However, there are advantages to borrowing additional funds to improve his cash flexibility and to consolidate his debt at a lower interest rate.
Do you agree with his estimate of the company’s loan requirements? Butler can meet their expected sales without additional funding. If the goal is to eliminate the trade debt, while maintaining the current bank note at $247,000, Mr. Butler would need an additional $124,000, the remaining balance after subtracting $33,000 from the trade credit of $157,000. But the current bank will not offer this additional funding, which would then come to $371,000, resulting in the discussions with Northrup.
As Mr. Butler’s financial advisor, would you urge him to go ahead with or reconsider his anticipated expansion and his plans for additional financing? We feel that Butler should go ahead with the anticipated expansion because the business is profitable and growing. However, as shown above, this will require additional working capital to meet his current obligations to his lender and suppliers. Current liabilities total $404,000, so the credit line under consideration will provide additional financial flexibility, which is needed considering the downward trend of the current ratio. Furthermore, the debt would be carried at a more favorable rate. Finally, based on financial projections, Butler would have an additional $33,000 available to begin paying down this debt by the end of 1991.
As the Banker, would you approve his loan, and under what conditions? Yes, we feel that the cash shortage is a short term problem and that the underlying business is sound and his references and credit history are favorable. However, there are several areas of concern that should be monitored as a condition of the loan. First, the Days Sales A/R ratio is trending in the wrong direction, and more effort needs to be spent on collecting receivables in a timely manner. Additionally, the Inventory Turnover is decreasing, tying up too much cash, and exacerbating the shortage of working capital. More effort needs to be spent on inventory management, making sure there is not a growing amount of stagnant inventory, and that the mix is correct for the intended market. In addition to the conditions stipulated in the text, the bank should put require that these two ratios (Days Sales A/R and Inventory Turnover) return to their 1988 levels, and that Mark Butler’s compensation be tied to these objectives.

Exhibit 1 is the Projected Income Statement for Butler Lumber Co. Beginning inventory was pulled from the previous year’s ending inventory. Purchases were projected from a trend of 75.5% of sales for the previous 3 years. The total cost of goods sold assumed the previous 3-year average of 72% of sales would continue. Interest expense was extrapolated from the $10,000 1st quarter amount, multiplied by 4 quarters. Provision for income taxes was calculated as 15% for the first $50,000 income, and 25% of the remaining income.

Exhibit 2 is the Projected Balance Sheet for Butler Lumber Co. for the year ending December 31,1991. The balance sheet was created with the assumption that Butler wouldn’t take the additional loan. The trend that cash followed from the previous years was used to project the cash asset. Accounts receivable was based on an increasing average trend of .7%. The average inventory turnover was 4.73 for the previous 3 years. Property was expected to increase by $20,000 based on the previous year’s trends. The note payable was expected to be maxed out immediately. The note payable from the trade partner would continue at $157,000. Accounts payable stayed at 46 days, as in the prior 2 years. Accrued expenses were based on an increasing trend of $3,000 annually on top of the previous year’s numbers. The long-term debt for the purchase of the company would be paid down to $43,000. According to the balance sheet, Butler has an additional $33,000 left over after meeting his short term requirements.
Additional assumptions:
 No more trade credit is available
 The loan from Suburban is the only note to be rolled into the Northrup loan.

Exhibit 3 is a table of all the relevant financial ratios for Butler Lumber dating back three years.
Liquidity Ratios. The notable trend in this section is that trend is toward reduced liquidity, which has precipitated the discussion. Butler is experiencing a shortage of working capital that needs to be addressed to sustain growth in this profitable business.
Leverage Ratios. The data shows that Butler is becoming more leveraged, primarily in terms of short term debt. It further shows that the interest expense is outpacing the earnings growth, which could be helped by securing the new loan at a more favorable interest rate.
Utilization Ratios. The numbers in this section are also trending in the wrong direction, but this is an area that can be more directly managed. In particular, we feel that Inventory Turnover needs to be improved through better management of the inventory mix, and that increased effort is required to encourage customers to pay in a more timely manner. Done correctly these two actions should actually help reverse the downward trend in profit margin.
Profitability Ratios. Again, all of these ratios are trending in a negative direction, as a result of the analysis presented above. Going forward with the proposed financing strategy would have two fundamental advantages. First, the debt would be carried at a lower interest rate which would reduce interest expense and improve earnings. Second, based on financial projections it is believed that 1991 will result in $33,000 available to reduce this short term debt.

Return to 123HelpMe.com