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 Background 2 1.1 Butler Lumber Company 2 1.2 Fast Facts of Financial Status 2 1.2.1 Important Numbers 2 1.2.2 Operating Statements 3 1.2.3 Balance Sheets 4 1.3 Challenges 5
2 Analysis and Solutions 7 2.1 Financial Ratio Analysis 7 2.1.1 Liquidity Measurement 7 2.1.2 Profitability Indicator 8 2.1.3 Debt Ratios 9 2.1.4 Operating Performance 10 2.1.5 Cash Flow Conditions 11 2.2 Solutions 12 2.2.1 Is
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).