Butler Lumber Case Study Analysis Essay

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Subject: Butler Lumber Company Problem: Whether Mr. Mark Butler should go ahead with financing from Northrop National Bank or should stay with Suburban National Bank. Options: 1) Enter into a loan agreement with Northrop National Bank for USD 465,000 (Assumption: The condition to sever the relationship with Suburban National Bank applies to Short Term Loan only) 2) Continue short term lending relationship with Suburban National Bank for USD 250,000 and secure the company’s loan with real property Recommendation: Given available data, Butler Lumber…show more content…
These profitability ratios indicate a better result by taking up the new loan than staying with the old bank. By Dupont analysis (Please see exhibit___), the main drivers for the higher ROE for new loan is due to higher profit margin which offset the lower equity multiplier. The effect of the discount income has driven the profitability, which in turn reflected also in the ROE and ROA ratios. Changes in Flexibility with the new loan Decreasing Flexibility in Managerial Decisions: The company becomes less flexible in its managerial decisions by taking up the new loan. It would be bounded by the negative covenants imposed by the new bank. These negative covenants place clear restrictions to Butler’s future managerial decisions, including investments in fixed assets and limited withdrawals of funds. Because of Butler’s conservative operating so far, he should be able to deal with these restrictions. Furthermore, Butler Lumber’s increased sales are shielded from the general economic downturn to some degree due to the relatively large proportion of its repair business. This will facilitate the maintenance of the net working capital even in a general economic downturn stage. As additional part of the covenants the bank placed importance on the net working capital. This could have positive impact to the firm’s future. As the firm is affected by liquidity problems, the covenants on net working capital will make Butler to
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