Finance Case

Why has Clarkson Lumber borrowed increasing amounts despite its profitability?There are a couple of reasons for Mr.

Clarkson wanting to increase the amount of borrowing that would be needed to continue with his operations. One of the

reasons is that he wants to pay off Mr. Holtz in order for himself to become the primary owner of the company. Another

reason for the need to borrow funds is that the net income was growing at a slower rate than the operating expenses.

Between the years of 1993-1995 the net income only rose from 60k, 68k ,77k thousand respectively. The operating costs

for the 3 years rose from 622k, 717k, 940k thousand respectively. Mr. Clarkson needs to take out a loan so he could

increase the purchasing power for goods. This would be accomplished by Mr. Clarkson having liquid cash to use for prompt

payment, which will lead to acquiring trade discounts and then Mr. Clarkson will have a competitive advantage in terms of

buying power.

2. How has Mr. Clarkson met the financing needs in the past?The financing needs of the past have been met by taking a

term loan of $399,000 that was fixed by the assets the company had. Mr. Clarkson had control liabilities that were offset by

the increase in sales.

3. How much will Mr. Clarkson need to finance the expected expansion in salesto $5.5 million in 1996 and to take all trade

discounts?Based on the pro forma balance sheet and the pro forma income statement, Mr. Clarkson would need $750,000

loan. This would be justified in terms of using the following formulas, which is derived from the 1996 Pro Forma Balance

Sheet (figures are in thousands):Total Assets – Total Liabilities – Net Worth 2179 - 533 – 1395 = 251Following the 251 that

would be needed to aide in reaching the goal of $5.5 million is $399,000 thousand to pay off the loan to Suburban Bank,

which would bring the total needed to $650,000. Finally, Mr. Clarkson would be able to take out the remaining $100,000

that he needs to pay off Mr. Holtz, which brings the total to $750,000.

4. What would you do as an advisor to Mr. Clarkson? What would you do as abanker who needs to approve the loans?As an

advisor and a banker I would look at the past balance, income and expense sheets and see how the business operates. I

would then find out where Mr. Clarkson would like to see the business in the next 5 years and create a future pro forma

balance, income and expense sheet. With those facts and predictions in place, a person could