Butler Lumber

Topics: Debt, Leverage, Financial ratios Pages: 2 (622 words) Published: July 17, 2009
The Butler Lumber Company

1) Is Butler Lumber a profitable business?
2) Why does Mr. Butler have to borrow so much money to support their business? 3) Prepare pro forma income statement and balance sheet. Is Mr Buttler’s estimate loan requirement correct? What amount will he need to finance the expected sales increase? 4) As his financial advisor, would you support this expansion? As his banker, would you approve the loan and under what conditions?

1) The Butler Lumber Company has positive Profit Margins and ROEs, therefore it is a profitable business. Nevertheless, both ratios are on a relatively low level. In addition, below are some other ratios on the company that I might refer to later: [pic]

2) As in the table above, the collection days for Accounts Receivable are rather long. With increasing sales figures, as displayed in the previous years by the Butler Lumber Company, these long collection days have a greater effect on the business as the amount of outstandings – proportional to the sales figures – increase also. The very low and decreasing leverage ratio also indicates, that instead of financing mainly via short-term debt, the company should consider to take up more long-term debt for their financing needs. The high amount of necessary funds is also arising from the fact that Butler Lumber was able to strongly increase sales during the last years, while asset turnover, profit margin and equity multiplier remained on similar levels. This indicates that the company has grown stronger in sales than it could sustain by itself and therefore needed extra funds from outside of the company. All sustainable growth rates were lower than actual growth: [pic]

3) Estimated Income statement under the assumption of loan taken and sales of $3.6 million: [pic]
Estimated Balance Sheet under the assumption of loan taken and sales of $3.6 million: [pic]
In my opinion Mr. Butler’s loan requirement is not to the amount of $465T, but rather higher...
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