Butler Lumber Company

Topics: Balance sheet, Asset, Investment Pages: 2 (1343 words) Published: November 2, 2014

Mark Butler, sole owner and president of the Butler Lumber Company has approached George Dodge of the Northrop National Bank with a request for a loan of $465,000 to finance the company’s anticipated growth in the near future. The company’s current bank cannot provide it with an amount higher than $250,000, a figure too low to meet its substantially large working capital requirements. It is for this reason that Mr. Butler is seeking the new banking relationship. The problem that lies before, Mr. Dodge now is whether or not to grant the requested loan and, if yes, under what conditions. The three alternatives at his disposal are to extend the loan as wished by Mr. Butler, to extend the loan but impose weighty conditions and to refuse the loan. He must carefully evaluate each of these options in the light of Butler Lumber Company’s latest financial ratios, its sales and growth forecasts for the upcoming year and the availability and management of assets on the company’s part.As the first option, Mr. Dodge could, on behalf of his bank, consider granting to Butler Lumber Company the entire loan of as requested. This will entail creation of a revolving, secured 90-day note worth $465,000 and will involve the bank’s standard covenants, such as restrictions on additional borrowing, additional investment, large working capital changes and withdrawals by the owner, being imposed on the company. The rate of interest will stand at 10.5%. This decision has potential to be advantageous keeping in view the highly positive trade letters received from Mr. Butler’s professional acquaintances. Moreover, the company has been rapidly growing over the recent years and according to the bank’s investigator, the sales are expected to keep rising to reach $3.6 million for the forthcoming year (Appendix 4). The company’s inventory turnover and accounts receivable ratios too are significantly impressive showing an effective asset management on its part (Appendix 3). While these facts...
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