First, Butler Lumber Company in the spring of 1991 anticipated a further substantial increase in sales. It means there are more working capital associated with the company’s increasing sales volume. Second, although they have good profits, the company had experienced a shortage of cash. The company’s current borrowing from Suburan National Bank almost reaches the maximum loan that SN Bank would make. Meanwhile, the SN Bank now asks Butler Lumber to secure the loan with its real property. Third, Mr. Butler had recently bought out another partner’s interest for $105,000 and incorporated the business, and he raised a loan of $70,000 negotiated in late 1988. All these reasons pushed Mr. Butler to negotiate a larger and unsecured loan.
2.Do you agree with the estimate of company’s loan requirement? How much the company will have to borrow, assuming sales of $3.6 million in 1991? My calculations of the company’s Operating Statements and the Balance Sheets are accord with the estimate they made in the article. According to my numbers, Butler Lumber Company will need to borrow approximately $297,000 for the second quarter of 1991. Since there are 55% of total sales were made in the six months from April through September, the First Quarter is probably the worst quarter in the whole year, which only contributes 20% of the sale. But the company did ok with their first quarter so far, it indicates that the company will definitely do better for the next three quarters in year 1991. *Please see details from the Operating Statements and Balance Sheets enclosed.
3.Would you advise Mr. Butler to expand his business and borrow or reconsider his expansion plans? --Current Ratio=Current assets/Current Liability=1199/767=1.56 --Debt Equity ratio= total debt/total equity=50/432=11.6%
--Receivables turnover=Sales/ acc receivable=3600/432=8.33
According to these ratios, the company now is in...