Clarkson Lumber Case
I. Statement of Problem.
The basis of Clarkson Lumber Companies problems occurs from their rapid growth in the recent years. Sales have increased by 54.7% from 1993 to 1995; assets have increased by 78.12%, while net income has only increased by 28.33%. In order to support these growth patterns, Mr. Clarkson has been required to rely on loans in order to have sufficient funds. Also, Mr. Clarkson decided to buy out his old partners Holtz’ interest in the company. Clarkson got the maximum amount of financing possible with Suburban National Bank, 399,000, so they need to look for alternative financing in order to support this growth.
II. Statement of Facts and Assumptions.
We projected that Clarkson’s profitability will keep their growth rate steady in 1996 and beyond. In the past Clarkson has been able to maintain their financial needs through small term loans with Suburban National Bank, and with limited investments in property. In order to sustain their profit levels, Mr. Clarkson has reached out to Northrop Nation Bank to obtain a loan and was granted $750,000. Our assumption is that Mr. Clarkson will take the loan, but it will be exhausted quickly. As you can see in our attached exhibits we believe a majority of the loan will be absorbed in 1996, $656,000, with the remainder being used up in 1997. A majority of this is comprised from the 399,000 required to pay off Suburban National Bank, and the remaining 100,000 still owed Holtz. An aspect that is hurting the Clarkson Lumber Company is there lower than average gross margin numbers. Their increases in debt ratios and accounts receivable shows that the company needs more money to keep up with the current growth in sales and inventory. We used the assumption that Clarkson Lumber would continue its growth at 22% YoY, which is the growth from 1995 to 1996. With this loan, Clarkson would be able to take advantage of the 2% discount most of their clients allow them if they pay...
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