Clarkson Lumber Company (CLC), founded almost 30 years ago, created door items and plywood molding and sash. CLC primary clients were the retail marketers. In 1994, Clarkson made the decision to purchase Holtz be part of the organization for $200,000 in payments in an interest of 11%. Clarkson needed financial loan to invest in this and many other activities. The company was growing quickly, and Clarkson needed money to grow it. Furthermore, CLC was facing lack of cash, therefore it needed finance to repay its creditors. It grew to become essential for CLC to improve its borrowing from Suburban National Bank to $399,000 that was the utmost loan provided by the financial institution to the one customer. CLC faces lots of cash flow problems because of increases in A / R, inventory and financial loans. Mr. Clarkson needs to approach another bank for loan with a minimum of $750,000 to resolve this issue.
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?