Clarkson Lumber Company Essay
Clarkson Lumber Company Solutions Questions:
1.What problems does Clarkson Lumber face?
2.Why does Mr. Clarkson have to borrow money to support this profitable business?
3.Is a line of credit of $ 750,000 sufficient to meet the firm’s future financial needs?
4.As a banker, would you approve Mr. Clarkson’s loan request, and if so, what conditions would you put on the loan?
1. The Problem Defined:
The Clarkson Lumber Company has been expanding rapidly for several years. Increases in working capital requirements have outgrown the capacity of the firm to generate funds from internal sources. Also, part of the funds were used to buy out a partner, further increasing financial pressure. The firm has foregone taking discounts on accounts payable and is borrowing increasing amounts from the bank so as to maintain its expansion. Mr. Clarkson’s decision today is whether to expand and , if so, how to raise new funds. He is seeking a new bank connection from which he can borrow larger amounts. In turn, the bank must estimate the amount of funds actually needed by Mr. Clarkson, the probable repayment schedule, the nature and degree of the risks incurred and the appropriate terms of such a bank loan. …show more content…
Why Borrow?
See statement of changes in cashflows from1993 through 1995 in Table TN-A
Points to Note:
The RAPID INCREASE in Accounts Receivables, Inventory, and Plant & Equipment have mainly been responsible for Clarkson’s urgent need for funds. The Buyout of Clarkson’s partner has added fuel to the fire.
A major reason for the increase in accounts receivables and inventories since 1993 has been the RISING SALES VOLUME.
Also, the Collection period has increased from 38 days at year-end 1993 to 49 days at year-end 1995. See Table TN-B.
What combination creates a voracious appetite for external financing?
1.Rapid Sales growth, PLUS
2.A Long Cash Cycle PLUS
3.A Low Profit
1.What problems does Clarkson Lumber face?
2.Why does Mr. Clarkson have to borrow money to support this profitable business?
3.Is a line of credit of $ 750,000 sufficient to meet the firm’s future financial needs?
4.As a banker, would you approve Mr. Clarkson’s loan request, and if so, what conditions would you put on the loan?
1. The Problem Defined:
The Clarkson Lumber Company has been expanding rapidly for several years. Increases in working capital requirements have outgrown the capacity of the firm to generate funds from internal sources. Also, part of the funds were used to buy out a partner, further increasing financial pressure. The firm has foregone taking discounts on accounts payable and is borrowing increasing amounts from the bank so as to maintain its expansion. Mr. Clarkson’s decision today is whether to expand and , if so, how to raise new funds. He is seeking a new bank connection from which he can borrow larger amounts. In turn, the bank must estimate the amount of funds actually needed by Mr. Clarkson, the probable repayment schedule, the nature and degree of the risks incurred and the appropriate terms of such a bank loan. …show more content…
Why Borrow?
See statement of changes in cashflows from1993 through 1995 in Table TN-A
Points to Note:
The RAPID INCREASE in Accounts Receivables, Inventory, and Plant & Equipment have mainly been responsible for Clarkson’s urgent need for funds. The Buyout of Clarkson’s partner has added fuel to the fire.
A major reason for the increase in accounts receivables and inventories since 1993 has been the RISING SALES VOLUME.
Also, the Collection period has increased from 38 days at year-end 1993 to 49 days at year-end 1995. See Table TN-B.
What combination creates a voracious appetite for external financing?
1.Rapid Sales growth, PLUS
2.A Long Cash Cycle PLUS
3.A Low Profit