Clarkson Lumber Case Study

Corporate Finance

Second assignment

Clarkson Lumber

     Group B

                                                                   Steven Chow

                                                          Luís Gulbenkian

                                                          Charlotte Lindsey

                                                          Sahil Lodha

                                                          Cecilia Padrón

                                                          Quentin Spirgi

                                              Gioia Trento

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        Financial Analysis        

Q1. How attractive is it to take the trade discounts?

Clarkson Lumber up until now has never benefited from the 2% discount offered by suppliers, due to its liquidity problem discussed previously.

 However, as shown by the financial statements, the possibility of taking the discount seems to be very attractive for several reasons:

1. In 1996 Net Income increases by more than 50% if the discount is taken, reaching a value of 195.18 thousands of dollars compared to the 128.54 thousands of dollars obtained if Mr. Clarkson continues with the prior strategy.
2. The discount has a positive effect on COGS as well, which decreases by $87.69 if the discount is taken.
3. With regards to the networking capital, the 2% discount seems to lose its attractiveness. The variation in NWC is higher with the discount due to the fact that accounts payable are lower, the result is:

NWC without discount: - 180.33

NWC with discount: - 192.65

Since Net Working Capital has a negative effect on Firm Free Cash Flow to Equity, taking the discount means less cash contributing to equity owing to the fact that it is required for short term firm’s operation activities.

 Nevertheless the resulting increase in Net Income discussed in point I. is sufficient to compensate the negative effect on the net working capital caused by the discount.

1. Clarkson Lumber is able to contract a smaller loan than without the discount.

Q2. Prepare a full set of financial statements (BS, IS, CFS) for 1996 through 2011 for two different strategies:

1. Growth with 10% annual rate and use purchase discount (all the discount is taken)
2. Growth with 25% annual rate without purchase discount (none discount is taken)

You can assume tax rate at 24%

See exhibits 1 to 4

Assumptions for financial statements:

1. Same proportion to Sales as 1995:

 Balance Sheet: Cash, Accounts Receivables, Inventory, Accounts Payable, Accrued Expenses, Net Fixed Assets.

Income Statement: Purchases, Ending Inventory, Operating Expenses.