Butler Lumber Company Case Study Report

Topics: Cash flow, Balance sheet, Generally Accepted Accounting Principles Pages: 20 (6111 words) Published: May 2, 2012
Corporate Finance Case Study Report Ⅰ|
Butler Lumber Company|


陈怡 1091209054
严伟洁 1091209036
姜帆 1091209052
敖翔 1091209024

In this report, we study the case of Butler Lumber Company and analyze the financing problem it was facing. First, we give a brief review of the background information of the company. Then we diagnose the business by examining its financial statistics and discover that company was seriously lacking of cash due to the poor operation of working capital and cost control. Free Cash flow is the key concern in our estimation. “Break-Even Analysis” stressing on the balance of free cash flow is applied in the estimation of the loan amount needed for anticipated sales growth. In the third part, we offer the comments from financial advisor and the banker. The financial advisor was supposed to suggest Butler downsize his business, carefully manage the working capital, control the operation expense and maybe resort to equity finance instead. Relevant “Sensitivity Analysis” is offered. For the bank officer, we advise him to ask for the right of supervising the operation of inventory and collection of accounts receivable. Except for that, the right of bank to adjust the loan limit inversely related to the financial health conditions could lower the risk taken by the bank. Finally, the conclusion and takeaways we draw from the case are stated.

Key Words: Free Cash Flow; Working Capital Management; Break-Even Analysis; Sensitivity Analysis.

1 Background2
1.1Butler Lumber Company2
1.2Fast Facts of Financial Status2
1.2.1Important Numbers2
1.2.2Operating Statements3
1.2.3Balance Sheets4
2Analysis and Solutions7
2.1Financial Ratio Analysis7
2.1.1Liquidity Measurement7
2.1.2Profitability Indicator8
2.1.3Debt Ratios9
2.1.4Operating Performance10
2.1.5Cash Flow Conditions11
2.2.1 Is external financing necessary?12
2.2.2 Estimation of Loan13
3 Comments19
3.1 As BLC’s financial advisor19
3.1.1 Downsize the Sales19
3.1.2 Inventory Management20
3.1.3 Accounts Receivable Management21
3.1.4 Operating Expense Control22
3.1.5 Equity Finance23
3.2 As a banker23
3.2.1 Supervision of Inventory and Accounts Receivable24
3.2.2 Adjustment of Loan Limit24
4 Conclusion25

1 Background
1.1 Butler Lumber Company
The Butler Lumber Company (BLC) was established in 1981 by Mark Butler and Henry Stark, registered as partnership in a thriving suburb of a big city in the Pacific Northwest. BLC supplied plywood, moldings, and sash and door products mainly for repair work and relied on local retail distribution to a large extend. The company had been realizing the continuing expansion of sales volume by adopting price competition including the quantity discounts and credit terms. On the other hand, the competitive price was due to the purchases of materials at substantial discounts. In 1988, Mr. Butler bought out Mr. Stark’s shares and became the sole owner and president of the firm. 1.2 Fast Facts of Financial Status

1.3.1 Important Numbers
Some important numbers, selected from the main body of the case, were arrayed below for further use in later analysis.

Table 1.2.1
Number| Explanation|
55%| About 55% of total sales were made in the second and third Quarters| 30| Credit terms of net 30 days on open account were usually offered to customers and Accounts were due in 30 days at the invoice price| 2% 10| The usual terms of purchase in the trade provided for a discount of 2% for payments made within 10 days of the invoice date| 15% 25%34%| Butler was taxed at the rate of 15% on its first $50,000 of income, 25% on the next $25,000 of income, and 34% on all additional income above $75,000| $3.6 million| Sales were...

References: Oliver E. Williamson (1988) Corporate Finance and Corporate Governance, Journal of Finance, No.3, July, 567-591
Stephen A. Ross, Randolph W. Westfield, Bradford D. Jordan, Corporate Finance, 7th edition, 2006, McGraw-Hill & China Machine Press.
Andre F. Perold, Ford Motor Company’s Value Enhancement Plan (A) , Financial Management, 2008, Chinese Renmin University Press.
[ 1 ]. In fact, the two rights of bank stated in 3.2.1 and 3.2.2 make the loan very similar to the “Dequity” mentioned by Williamson in “Corporate Finance and Corporate Governance” in Journal of Finance, 1988.
[ 2 ]. The most important takeaway in the case Ford Motor Company’s Value Enhancement Plan (A).
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