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Case Study Questions

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Case Study Questions
Clarkson Lumber Company

The Clarkson Lumber Company case is divided into 3 parts.

Part I deals with assessing the financial performance of the firm. For this section you need to able to understand why Clarkson Company is so short of funds despite its record of profitable operations and, in this connection, develop the distinction between profits and cash requirements. An important contribution in this part is to emphasize the dichotomy between accounting income and cash requirements.

Part II covers the calculation of the funding needs. The bank must estimate the amount of funds needed by Mr. Clarkson, the probable repayment schedule of its loan, and the nature and degree of the risks it would be incurring …show more content…

A more detailed look at profitability shows:

10. How do operating margins look like? Why? Why do you think net margins are down? Is it tax expense or is it interest expense the problem? To answer this questions you need to construct the following ratios: * Interest Expense Ratio = Interest Expense / EBIT * Effective or Average Tax Rate = Income Taxes / EBT (What is the difference between this tax rate and the marginal tax rate? Which one should we use? Why? Why not?)

11. Let’s now concentrate on the concept of turnover. For this reason be sure to understand the following concepts:

What explains the decline in overall asset turnover? Why?

12. Does Clarkson Lumber have excess funds tied up in the business in 1995 that could be released to alleviate her cash squeeze? For example, suppose that Clarkson Lumber could return to the 1993 DOH levels. Calculate the funds released from achieving these new (or really old!) targets?

13. Finally, let’s concentrate on the financing side of Clarkson Lumber and its cash cycle. What do you conclude? Why? For this reason be sure to understand the following concepts:

Part II: Determining Funding Needs

Based on our previous analysis, please estimate the external funds that Clarkson Lumber Company will need at the end of 1996.

Project sales of $5.5 million but assume that 1996 will

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