A fast growing retail lumber firm’s owner is assessing the financial effects of sustained and quick growth. The extent of the firm’s future financial needs must be reviewed while keeping in mind the company’s ability to raise finance through bank dents or equity. A redrafted account of a previous case.
Cash to cash cycle (dollars)
Annualized Interest rate
Projected income statement for 1996 (thousands of dollars)
Projected balance sheet for December 31, 1996 (thousands of dollars)
1. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability?
2. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated? (Prepare a projected income statement for 1996 and a pro forma balance sheet as of December 31, 1996.)
3. How attractive is it to take the trade discounts?
4. Do you agree with Mr. Clarkson’s estimate of the company’s loan requirements? How much will he need to finance the expected expansion in sales to $5.5 million in 1996 and to take all trade discounts?
5. As Mr. Clarkson’s financial adviser, would you urge him to go ahead with, or to reconsider his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Clarkson’s loan request, and, if so, what conditions would you put on the loan?