Essay about Butler Lumber Case Study Solution

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Butler Lumber Case Study Solution

Options: The Butler Lumber Company (BLC) could obtain from Suburban National Bank maximum loan of $250,000 in which his property would be used to secure the loan. Northrop National Bank is considering BLC a line of credit (LOC) of up to $465,000. BLC would have to sever ties with Suburban National if they were to have this LOC extended to them.

| 1988 | 1989 | 1990 | 1991Q1 | EBITDA coverage (times) | 2.5 | 2.26 | 2.15 | 2.1 | Debt Equity Ratio | 0.55 | 0.59 | 0.63 | 0.67 | Current ratio | 1.80 | 1.59 | 1.45 | 1.61 | Quick ratio | 1.37 | 1.09 | 0.67 | 0.54 | Return on sales (margin) | 1.8% | 1.7% | 1.6% | 1.7% | Return on assets | 5.2% | 4.6% | 4.7% | 4.9% | Return on equity |
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I came up with $3.2m by taking the 1st quarter revenue of $718,000 which is historically approximately 22.5% of the yearly revenue. Assuming this holds true again in 1991, the annual revenue in 1991 will be around $3.2m. This is a 19% year over year increase in revenue for BLC, which is in line with their year over year growth in 1989, and less than the 34% in the best year, 1990.

The margins are not great for this industry, and BLC is no exception. Even with the excellent year over year growth in revenues for this company, BLC is on pace for another dismal year of net income in the high $40k. The net income for this company has been constant; $31k in 1988, $34k in 1989, $44k in 1990, and an estimated $49k in 1991. Net income of this size should not warrant extending a line of credit to this company. As the banker, I would not grant a LOC or any other type of loan this size. I would consider granting this company a smaller LOC with the similar stipulations of maintaining an appropriate working capital amount, fixed asset purchases would need bank approval and that Butler would put up personal property and his insurance policy as collateral for the loans that the business

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