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Clarkson Lumber Company Case Study Essay

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Q1-1. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability?

Because they have faced cash shortage trouble. Their profitability has grown for 1993 ~ 1995 period, as we can see from their I/S (e.g. Sales and Net Income, etc.). However, as its business size grows, their A/R increased, which means that it is getting difficult to collect cash. On the other hand, A/P decreased for the same period, which means that the company paid cash for A/P, resulting in critical cash shortage. Furthermore, the A/P payment period is shorter than A/R collection periods, the company’s cash problem happens to be accelerated.
(Exhibit 1) | 1993 | 1994 | 1995 | 1996 | CAGR | AR / Sales | 0.105 | 0.118 | 0.134 | 0.137
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How attractive is to take the trade discounts?

If the company can solve the cash shortage problem, taking 2% trade discount is profitable decision.
The Net Income when taking non-trade discount is $ 87K and taking trade discount is 131K. The difference is obvious. Trade discount is very attractive for the company.

Q3. Do you agree with Mr. Clarkson’s estimation of the company loan requirements? How much will he need to finance the expected expansion in sales to $ 5.5 Mil. In 1996 and to take all trade discounts?

No, Mr. Clarkson’s estimation for loan requirements ($ 750K) is not enough. He needs to borrow more than $ 750K. As you can see from our 1996 pro-forma Balance Sheet (with discount, without discount, respectively), in the both of cases, the company still needs more than $750K from bank to meet their financial needs. In case of not taking all trade discount, (1996 pro-forma without discount) the company needs to borrow $ $905K, on the other hand, in no trade discount case, the company even needs more money ($1,112K) to finance their expected expansion. (Please refer to attached excel file for 1996 pro forma B/S and I/S.)

Q4-1.
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