Butler Lumber Company;Estimating Funds Requirements;(AFN)

Butler Lumber Company;Estimating Funds Requirements;(AFN)

Prepare a short report(2-3 pages)
explaining Butler Lumber’s financial situation. You should consider
your audience to be Mr. Butler.  Be sure to at least answer the following questions in your
report
and
support your argument with detailed financial models which you will provide to Mr.  Butler
(via e

mail to
Professor Tice)
on the project due date
along with
the report
that references your supporting data,
addresses the key questions in the case
, and outlines a defensible recommendation that
Mr.  Butler
can
use in discussions with
his
bankers.
A hard copy of the
report
and financial analysis
should be
turned
in at the start of class on the due date
.
Assignment:
1.
Compute
the relevant
ratios for
Butler Lumber Company for the years 1988

1991
(remember to annualize
the income statement information for
the
1991
ratios).
2.
Prepare a Statement of Cash Flows or Sources and Uses statement for the aggregate period
1988

1991 (i.e., use the 1988 and first
quarter 1991 balance sheets to compute the changes
in balance sheet accounts).
3.
Base
d on the work in
question
s
#1
& #2
, summariz
e
your major findings.  Address
the firm’s
liquidity, debt management, profitability, asset management, and working capital posit
ion.
a.
I
dentify any problem areas that you may see.
b.
Use this analysis to d
etermine why
Butler Company is so short of
cash
despite its record
of
profitable operations
.
3.
Do you agree with Mr. Butler’s estimate of the company’s loan requirements
, including te
rm and
total amount required
?  How much will he need to borrow to finance his expected expansion in
sales? (Assume a 1991 sales volume of $3.6 million).
a.
Using 1990 ending balances as starting points, p
repare 1991 year

end pro

forma income
statement and bal
ance sheets under two scenarios:
i.
They continue to rely heavily on trade credit as a source of funds.
ii.
They pay accounts payable promptly in order to take advantage of the 2% trade discount.
b.
In choosing between the use of trade credit and bank loans as a sou
rce of funds, what
should
this decision be based
on?
Be sure to explain this in your
report
.
4.
As Mr. Butler’s Financial Advisor,
recommend
to Mr. Butler
whether he go ahead with
OR
reconsider
his anticipated expansion and his plan
s for additional debt
financing.
a.
If you recommend going forward with the expansion, indicate if you anticipate that the bank will
approve his loan and explain any conditions
(covenants)
you think the bankers would put on this
loan.
b.
Discuss relevant issues, recommendations, and any necessary changes in Mr. Butler’s business
practices your team identified through the analysis (including parts 1
through 4
).
c.
Identify the primary reason why Mr. Butler must borrow money to support this pro
fitable
business.  Provide specific solutio
ns to help him solve this issue, including the appropriate loan
term
and any additional sources of funding
that he should consider.

Sensitivity Analysis
Trade Credit vs. Discount
(thousands of dollars)

Inventory conversion period    78.81
Average collection period    43.07
Payables deferral period    48.27
CCC    73.61

Nominal annual cost of trade credit    19.46%
EAR    21%

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