Clarkson Lumber Company
The Clarkson Lumber Company case is divided into 3 parts.
Part I deals with assessing the financial performance of the firm. For this section you need to able to understand why Clarkson Company is so short of funds despite its record of profitable operations and, in this connection, develop the distinction between profits and cash requirements. An important contribution in this part is to emphasize the dichotomy between accounting income and cash requirements.
Part II covers the calculation of the funding needs. The bank must estimate the amount of funds needed by Mr. Clarkson, the probable repayment schedule of its loan, and the nature and degree of the risks it would be incurring in lending to Mr. Clarkson on the scale required.
Part III is based on a hypothetical situation where Mr. Clarkson, sole owner and CEO of Clarkson Lumber Company, receives a number of informal inquiries from large, nationally-recognized building materials distributors about purchasing his company. In this part you will help Mr. Clarkson to value the company as an on-going-concern.
Part I: Assessing Financial Performance
Read the Clarkson Lumber Company case and review the accompanying financial statements. To help you organize your thoughts for the case discussion during class, I would like to have you complete the assignment and think about the questions below.
Complete the attached worksheet, “Clarkson Lumber Co. Part I: Financial Analysis Worksheet,” which includes a summary of balance sheet changes and various financial ratios. Think about what information each ratio is designed to convey. Consider the implications of trends. Do not worry if you have some trouble with the interpretations since this is your first analysis. Be sure to complete the calculations anyway and we will discuss the interpretations as part of the case exercise. The more familiar you are with the numbers, the easier it will be to grasp the interpretations.
Notes: The term Debt is defined as the sum of all interest-bearing liabilities including “Notes Payable Trade.” When assessing Clarkson’s payment relationship with his suppliers, however, include “Notes Payable Trade” as overdue “Accounts Payable.”
1. What were the uses of funds between 1993 and 1995? What were the sources of funds over these periods? Has the financial strength of Clarkson Lumber increased or deteriorated?
2. Trace through the effects of the buy-out of Mr. Holtz’s interest in the company in 1994. How would the transaction show up in the accounting statements?
3. Explain the cause of Clarkson’s on-going financial difficulties and continuing need for additional outside funds? Why have his suppliers put him on a “notes payable” basis?
4. If Clarkson Lumber is as profitable as the income statement seems to indicate, then why is the firm always short of cash? Is it possible that the financial statements are misleading? Is possible that this is a poorly managed firm? Why has this profitable company had to borrow more and more money from the bank?
5. Does rapid sales growth always result in a need for substantial external finance?
6. If you were Mr. Jackson, would you be eager to loan money to Mr. Clarkson? When do you think he would be able to start repaying the loan? Is a line of credit the most appropriate form of financing for Clarkson? Will the proposed line of credit be adequate? More specifically, will a credit line of $750,000 be sufficient to meet the company’s needs in 1996 it takes “trade discounts”?
Part I: Financial Analysis Worksheet
Exhibit I: Net Income
7. The business seems profitable, so what is the problem?
To simplify the balance sheet, combine the various loans in the following structure:
Exhibit 2: Balance Sheet Information
Buy-Out of Mr. Holtz’s Interest
Measuring Financial Performance: The Shareholder Perspective Dupont Model