Butler Lumber Company Case
Summary of facts: In 1981 by Mark Butler and his brother-in-law Henry Stark founded the Butler Lumber Company. In 1988 Mr. Butler bought Mr. Stark’s share for $105,000 to be paid of in 1989 out of which $70,000 was raised by a loan carrying an interest rate of 11% and repayable at the rate of $7,000 over the next 10 years. Over the past five years, Butler Lumber Company has experienced rapid growth in its business. It derives its business from retail distribution of lumber products in the local area. A large portion of its business is based in repair services, and as a result, it should be somewhat protected from a downturn in the real estate market.
Sales volume has built up largely due to successful price competition, made possible by careful control of operating expenses, and quantity purchases at substantial discounts. Mark Butler, sole owner and president of the Butler Lumber Company is looking to increase the company borrowing. Suburban National Bank currently holds $247,000 of its debt. In order to increase its borrowing, Butler Lumber Company will have to switch debt holders from Suburban National to Northrop National Bank. Northrop National is currently analyzing the financial stability of Butler Lumber Company.
Problems: Butler Lumber Company has a problem with a shortage of cash resulting in an inability to satisfy the expansion of its rapidly growing business as evident by the balance sheet forecast for 1991(Exhibit 2). For this reason, Mr. Butler is seeking a larger unsecured loan in order to satisfy the company’s immediate need for cash.
Northrop National Bank is prepared to offer Butler Lumber Company a loan of up to $465,000. Will $465,000 be enough to satisfy Butler Lumber’s expanding business? (We are assume a 1991 sales volume of $3.191 million).
Why has sales growth been so strong while net income growth has been feeble at best?
Butler Lumber Company