'Butler Lumber Case Study Analysis Essay\r'

' meat: pantryman poke Company\r\n trouble: Whether Mr. Mark butler should go ahead with financial backing from Northrop topic shore or should stay with suburban discipline smoket.\r\n wefts: 1) sneak in into a contribute agreement with Northrop bailiwick Bank for USD 465,000 (Assumption: The condition to sever the family relationship with Suburban depicted object Bank applies to pitiful Term Loan only) 2) Continue oblivioussighted destination lending relationship with Suburban National Bank for USD 250,000 and secure the ac keep partnership’s bring with real quality\r\nRecommendation: Given available data, butler pound off familiarity should enter into a add agreement with Northrop National Bank for USD 465,000\r\nAnalysis:\r\nOur barrackation to Mr. Mark Butler to enter into agreement with Northrop Bank for duct quote of USD 465,000 is based on the future(a) factors:\r\nExternal Financing Need\r\nWe assessed the come with’s external fina ncing want in 1991 based on the amuse scenarios:\r\na)The current quarter scratch gross revenue of 1991 attributes 26% of annual gross revenue of community in 1991, since first quarter gross sales of 1990 contributed 26% of quantity 1990 light up sales and and then the original net sales projected for 1991 is USD 2.77 Mn. Balance Sheet and Income relation have been projected at contribution of sales (Please evoke to award nary(prenominal) 1). In this scenario, we assume society doesn’t opt to recurrence in discounts on its purchases b) force out gross revenue of USD 2.77Mn, company opts to take discounts on its purchases c)Net sales in 1991 of USD 3.6Mn as indicated by bank building’s investigator in the national study\r\n down the stairs two the to a higher place scenarios, company would need more than financing than its current bank credit readiness of USD 250,000.\r\nUnder scenario (a), if the company decides not to take discounts, then it would need short bound credit facility of USD 211,000 to meet its short term capital requirements, however company’s accounts account collectibles would growth to USD 263,000 and its net net profit forget be USD 49,000. Hence as far company’s financing need is concerned it mint incubate its short term relationship with the quick bank. On the other hand, if the company decides to take discounts, then it would need short term loan of USD 407,000 to meets its works capital requirements and accordingly would have to go into agreement with the spick-and-span bank. Under this scenario, company’s accounts payables would nitty-gritty to USD 55,000 and net profit would be USD 61,000.\r\nUnder scenario no (b), Butler Lumber add together assets be projected to outpace total liabilities (excluding short term loan) by USD 628, 000, hence the existing loan leave be far from fulfilling client’s works(a) capital needs and the loan from Northrop Bank will be able to bridge USD 465,000 of the gap, however company would still be needing USD 162,000 under current mode of operation. We recommend that apart from getting virgin course of study of credit from Northrop Bank, company should reduce its days receivables period.\r\n maturation in Profitability\r\nOption 1:\r\nIf the company rebrinys with the existing bank loan, the total arouse depreciates be projected to extend by USD 7,000 in 1991 and resulting into after-tax net profit USD 49,000 with loan from existing bank. The effective rate of interest expense is 13.2% with existing loan. (Please refer to exhibit _____)\r\nCompargond to 1990, ROA will remain the same at 5% and ROE will remain at 13%.\r\nOption 2:\r\nIf the company replaces its short term line of credit from its existing bank to overbold bank, the total interest expenses are projected to sum up by USD 11,000 in 1991, however company will be able to realise discounts of USD 27,000, resulting into after-tax net p rofit of USD 61,000 with new loan as compared to after-tax net profit of USD 49,000 with loan from existing bank. The effective rate of interest expense with new loan, after pickings effect of discount income, is 5.0% compared to 13.2% with existing loan. (Please refer to exhibit _____)\r\nCompared to 1990, ROA will ontogenesis to 6% while ROE will increase to 17%. These favorableness ratios indicate a better result by taking up the new loan than staying with the hoar bank. By Dupont analysis (Please see exhibit___), the main drivers for the higher ROE for new loan is due to higher profit molding which offset the lower equity multiplier. The effect of the discount income has driven the profitability, which in bending reflected also in the ROE and ROA ratios.\r\nChanges in tractableness with the new loan\r\n change magnitude Flexibility in Managerial Decisions:\r\nThe company becomes less flexible in its managerial decisions by taking up the new loan. It would be bounded by th e invalidating covenants imposed by the new bank. These prohibit covenants place clear restrictions to Butler’s future managerial decisions, including investments in unflinching assets and limited withdrawals of funds. Because of Butler’s bourgeois run so far, he should be able to deal with these restrictions. Furthermore, Butler Lumber’s increased sales are shielded from the general economic downturn to some degree due to the comparatively large proportion of its repair business. This will facilitate the maintenance of the net working capital even in a general economic downturn stage.\r\nAs additional part of the covenants the bank situated importance on the net working capital. This could have positive impact to the plastered’s future. As the firm is unnatural by liquidity problems, the covenants on net working capital will strive Butler to be more careful about firm liquidity in midst of sales expansion. Thus, it could reduce the endangerme nt of Butler ending back with a situation of liquidity issues.\r\nIncreasing Flexibility in Financial Opportunities:\r\nBecause company’s business is seasonal, the financial opportunities by the new loan offer scope to equipoise seasonal variations. Another point is the direct possible use of discounts provided by suppliers (see Increase in Profitability section).\r\nRatios (please refer to exhibit ___)\r\nOption 1: If Butler Lumber stays with the old bank we can observe a constant value, from 1990 to 1991, for net working capital, current and quick ratio. At first glance, seems that the firm is able to binding current liabilities with current assets, but, without the list (which takes more time to convert into money), the situation is tout ensemble different. The D/E increases from 1,68 to 1,72, while the interest coverage presents a value, that, even if lower, is congenial. With take in to the profitability, the ROA and the ROE remain constant. The cash pass increa ses from 64 to 72: this is due to an increase to both inventory and receivables period, even if we can observe an increase in the payable as well.\r\nOption 2: pickings the new loan lead to an increase in net working capital, mainly due to the reduction of current liabilities (in fact, scorn the increase in notes payable, there is a drastic reduction in accounts payable, in order to get the discount). In this scenario both current and quick ratio improve, indicating an service in firm’s liquidity. The D/E decreases from 1,68 to 1,62 and the interest coverage presents an acceptable value as well. Unlike scenario (a), profitability improves in a consistent guidance: ROA increases to 6% and ROE increases to 16%. The cash cycle rises significantly due to the combine effect of increase in inventory and receivables period and decrease in payable.\r\nAppendices\r\n reveal 1: projected income statement and relaxation carpenters plane\r\nProjected income statement\r\n19901991\r \nUSD in millions, FYE 31-DecActual% of Sales Scenario a-1Scenario a-2Scenario b Net sales12,694100.00% 2,7712,7713,600\r\nCOGS\r\n initiation Inventory326418418418\r\nPurchases2,0422,0182,0182,746\r\n2,3682,4362,4363,164\r\nEnding Inventory241815.52%430430559\r\nTotal COGS21,95072.38%2,0062,0062,606\r\nGROSS PROFIT744 765765994\r\n operate(a) expenses365820.90%667667840\r\nInterest expenses433N.A405151\r\nDiscounts 2742\r\nNET INCOME BEFORE TAXES53 5874145\r\n supplying for income taxes59101437\r\nNET INCOME44 4961107\r\nProjected balance sheet\r\n19901991\r\nUSD in millions, FYE 31-DecActual% of Sales Scenario a-1Scenario a-2Scenario b Cash2411.52%424255\r\n story receivable, net231711.77%326326424\r\nInventory418430430559\r\nCURRENT ASSETS776 7987981037\r\nProperty, net21575.83%161161210\r\n hail ASSETS933 9609601247\r\nNotes payable (bank)6233N.A247407465\r\nNotes payable (Mr. Stark)0N.A000\r\nNotes payable, trade0N.A000\r\nAccounts payable22569.50%2635575\r\nAccrued expenses39N .A393939\r\nL-t debt, current portion77N.A777\r\nCURRENT LIABILITIES535 556508586\r\nL-t debt750N.A434343\r\nTOTAL LIABILITIES585 599551629\r\nNet worth348N.A348348348\r\nRetained earnings84961107\r\nNew Net Worth397409455\r\nTOTAL LIABILITIES & NET WORTH933 9969601084\r\n hussy EFN -360162\r\nScenarios:\r\n-a-1 refers to projected sales of $2,771m in 1991 and a continuing relationship with Suburban National Bank -a-2 refers to projected sales of $2,771m in 1991 and a new relationship with Northrop National Bank -b refers to projected sales of $3,600m in 1991 and a new relationship with Northrop National Bank\r\nNotes:\r\n1 Q1 1991 sales are $718m. Q1 1990 sales were 25.91% of FY 1990 sales. We assume this ratio to be constant in scenario a. In scenario b, we swan of Northrop National bank’s assertion of $3,600m sales in 1991.\r\n2 fictitious to be percentage of sales.\r\n3 operate(a) expenses includes Mr. Butler’s salary. Operating expenses are projected by de creasing operating expenses of 1990 by $95K (salary) and applying percentage of sales to the operating expenses without salary, then adding back $88K (annualised Q1 1991 salary) to get the operating expenses of 1991.\r\n4 : As a corporation, Butler is taxed @15% on its first $50,000 sales, @25% on the next $25,000, and @34% on all additional income above $75,000.\r\n'