Case Study Butler Lumber

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Case Study: Capital Budgeting Butler Lumber Company Abstract Butler Lumber Company, a lumber retailer with a rapid growth rate, is faced with the problem of cash flow shortage. In order to support this profitable business, BLC needs a great amount of cash. The loan of $250,000 from Suburban National and a line of credit of up to $465,000 from Northrop National Bank are the two choices provided. After a brief review of the operation and financial conditions of BLC, we first make analysis of the credit level of BLC from the perspective of banker. Although the feedback from all the firms that had business dealings with Butler are quite positive , both solvency and liquidity condition and the mortgage indicates that it is not a wise…show more content…
The company’s debt position shows that there was rapid increase in Butler Lumber’s accounts and notes payable in the recent past, especially in the spring of 1991. This kind of notable increase of current liability should account for the increase mentioned above, which indicates the company’s great need of short-term funds. 1988 1989 1990 Debt Ratio 0.55 0.59 0.63 Leverage Ratio 1.2 1.42 1.68 Interest Coverage Ratio 3.85 3.05 2.61 2.1.2 Liquidity ratios Two-year decrease of liquidity measures including current ratio and quick ratio reveals the problems concerning company’s short-term solvency and liquidity. Butler Lumber Company’s current ratio decreased to 145.05% in 1990 from the level of 180.00% in 1988. The same decrease happened to quick ratio (decreased from 88.08% in 1988 to 66.92% in 1990). As the short-term lender, Northrop National Bank should have noticed that Butler Lumber Company’s ability to pay its bills over the short run without undue press needs to be carefully examined. The decrease of current ratio also implies the decreasing level of company’s net working capital, which is another sign of lower level of liquidity. 2.1.3 Operating management The days sales of inventory, days sales outstanding and days payable outstanding kept similar over the past three years. Since we cannot get the industrial average level, we cannot determine whether the level of Butler Lumber Company is reasonable. However, we can notice
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