Clarkson Lumber Company
1. Identify the key problem in the case and explaining why it is the key problem. Clarkson Lumber Company’s biggest problem by far is the fact that Mr. Clarkson had agreed to buy out Mr. Holtz for $200,000 with semi-annual installments of $50,000. It wasn’t necessarily a bad idea for Mr. Clarkson to buy out Mr. Holtz altogether, but the $100,000/year of payments is an unrealistic amount for Clarkson Lumber at this point in time. Between 1993 and 1995, there hasn’t been a year where they have realized more than $77,000 in net income, so the payment of $100,000/year is clearly unrealistic and a sure problem for the company. Another problem, which isn’t nearly as important as the former, is that net income is growing at a slower rate than sales are between 1993-1995. Sales grew 19% and 29% in 1994 and 1995, respectively, while net income grew just 13% in both years. This is important because the company can’t use intercompany funds to finance its projected sales growth. 2. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? Clarkson Lumber is borrowing at increasing amounts because the company’s sales are growing at a rate that can’t be financed from intercompany funds. The company’s sales have grown 19% and 29% in 1994 and 1995, respectively, which have consequently caused an increase in the company’s spontaneous assets as well as their net property. Their net property has grown 12% and 48% in 1994 and 1995, respectively, and we can expect that it will grow at 30% in 1996. Furthermore, their accounts receivables and inventories have been growing at an average rate of 41% and 32%, respectively. These increases in sponanetous assets and property need to be financed in some way, most likely through sponanteous liabilities and long/short-term debt. 3. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or...
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