Butler Lumber Case Analysis

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Butler Lumber Case Analysis
Question 1
Butler Lumber, a retailer of lumber products in the Pacific Northwest area, experienced a time of growth in the spring of 1991 (Harvard College, 2002, p.1). The company looked to take out a loan to grow business operations. The maximum loan offer from Suburban National Bank was $250,000 (Harvard College, 2002, p.1). This loan also required a pledge of property from company owner, Mr. Butler, to secure it. However, Northrop Bank would offer a loan up to
$465,000 (Harvard College, 2002, p.1). If he accepted this bigger loan, he would have to cut ties with Suburban National. Butler’s business ran off the ability to obtain resources at such a low rate by buying high quantity (Harvard
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In order to improve company finances, we have determined an optimal debt level for the company.
Also, Butler needs permanent financing (e.g., equity and/or long-term debt). He needs long-term capital to replace his former partner’s equity. He also needs additional long-term capital to fund the fixed portion of his working capital. If he were to replace some of his short-term funding with long term capital, much of his cash flow issue would be resolved.
If you ran a set of pro forma financial statements, you could derive a specific number for the cash required in 1991 and in subsequent years. Such an analysis might give you some indication as to what Butler can do to mitigate its borrowing needs (e.g., slow growth, get a handle on A/R and Inventory, etc.).
There are many factors that will lead to the company’s debt to become unsustainable.
These factor include the times interest earned ratio, the liquidity ratios, the inventory turnover, and the accounts receivable collections. To begin, the times interest earned ratio is a challenge for Butler Lumber. When Mr.
Butler took over the company, he paid $13,000 in interest expense from the $50,000 of operating profit (Harvard College, 2002, p.4). This created a times interest earned ratio of 3.85. This factor fell to 2.10 in the first quarter of 1991 because of increasing debt levels (Harvard College, 2002,
p.4). In other words, of each
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