I. Introduction Clarkson Lumber Company has been in growth during recent years and anticipated a further increase in sales. Despite of consistent profits, the company has suffered shortage of cash and borrowed fund needed for its business growth. Question #1 Increasing amount of borrowing despite of its consistent profitability came from following reasons. First is the firm’s financial position. As sales have increased by 60% from 1993-1995, the assets that support increase of sales increased by 78% (Exhibit 1 & 2). The increase amount of assets is over the amount of net income (addition to net worth). To meet financial needs, the company received short-term loans from bank, $60 in 1994 and $390 in 1995 (Exhibit 2). The gross profit …show more content…
Second, the restriction of investment in fixed assets can be obstacle of the business growth. The property/sales ratio was stable around 20% from 1993-95 along with sales growth (Exhibit 2). It implies that the company kept investing to fixed asset. Therefore, I would ask bank to change this requirement as; “If the company use the funds for business unrelated purpose, the lender has right to call immediately.” If the company will not take a full advantage of the trade discount, the company can keep their number of days purchases as 38.34 days. So, their expected account payable is calculated by following; Average purchases per day = Annual purchases/ 365 days = 4,277 / 365 days = 11.72 Account payable = Average purchase per day * number of days purchases = 11.72 * 38.34 = 449.26 Therefore, note payable to bank can be calculated through Balance sheet (Exhibit 3) as $654 K. We assume that the interest rate is 11% of the note payable to bank but it causes the unlimited repeat of calculation. We approximated the net worth with 1 iteration If the company will take a full advantage of the trade discount, company’s number of days purchases is 10 days. Account payable = average purchase per day * number of days purchases = 11.72 * 10 = 117.2 Therefore, the company have to borrow around $1,006 K from the bank in order to take a full advantage of trade discount. In this case, the company need to increase the credit limit over $1,000K. Question #5 As a financial
Be Our Guest’s balance sheet shows good signs of liquidity. Current Ratios for the past four years have remained above 1 proving that the company can handle its current liabilities. The current ratios are not extremely high (19941.27, 1995- 2.17, 1996- 1.15 and 1997- 1.16), but they can cover the current liabilities. It is important to note that the company is operating on a thin line because the current assets are barely covering the current liabilities. This is particularly unpleasant because we are dealing with a company operating in a seasonal business. It is a concern that the current ratio slightly eroded after 1995, and this is primarily due to Be Our Guest converting the bank line into long term debt in
This bank loan helped finance the increase in property and other related assets. The sponaneous assets that were increased as a result of an increase in sales were financed by an increase in sponaneous liabilities. Spontaneous liabilities have grown by 35%, which supports the claim that they finance the increase in accounts receivable and inventories. In the period between 1993-1995, the financial strength of Clarkson Lumber has deteriorated significantly. As seen from the financial ratios excel spreadsheet attached, the current and quick ratios have been gone down substantially. This means that the company’s ability to meet its short term obligations has deteriorated. Furthermore, the return on sales and return on assets have also gone down, which means that their increase in net income has not stayed consistent with the increase in sales and increase in assets to finance these sales. Their falling inventory turnover ratio means that even though their sales are increasing, they are not moving inventory at the same pace they had before. Their low accounts receivable turnover ratio and high dales sales outstanding indicates that there’s a large amount of money tied in this account.
This answer can be done in tabular form as well, with the interest on inventory appearing as a new column. If one order is placed a year, the average inventory is 1,000 kegs, worth $40,000, with annual interest charges (1.5 x 12 = 18%) of $7,200. Other interest costs are calculated in a similar fashion, adjusted for average inventory.
The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.
Remember, since there are no balance sheets or operating statements, you will have to MANUALLY calculate the ACP. Just look at the numbers: 30% pay after 10 days + 50% pay after 30 days + 20% pay after 60 days. What’s the average? Voila! Also, for consistency, use 360 days = one year
2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not
As inventories and account receivable steadily increased, the firm distressingly opted for a short-term solution. By means of long-term lending in 1994 and higher short-term credit in 1994 and 1995, SDI chose to temporarily resolve the current issues of the firm without considering the potential long-term ramifications. As illustrated in Table 1, long-term loans remained the same while short-term bank loans increased by 71% between 1994 and 1995; a drastic change within a short span of time (Appendix A). Similarly, as depicted in Table 2, the interest on the firm’s short-term loans rose from 1994 to 1995
Fishbone Corporation bought a new machine and agreed to pay for it in equal annual installments of $5,670 at the end of each of the next 10 years. Assuming that
Nutracuticals is an online direct-to-consumer supplier of dietary supplements for women. The company based in Miami, FL offers vitamin supplements from over 50 brand names/suppliers. This firm is currently breaking even, and the decisions made over the next three phases of the business, each three years spanning from 2013-2021, will dictate the firm’s profitability. The decisions will be based on financing options and resources (cash) available to the firm in each phase. Decision-making will be based on the impact to the business metrics involved including: sales, EBIT, net income (profit), free cash flow (FCF), and the total firm value. For the purpose managing inventories, growth, and adding value to the firm, as CEO I have chose to exercise theses three phase options, to follow.
First, the contractual balance owed under the Merchant Agreement is $17,727.36. A&S Accessory Trading made 24 daily payments (at $136.36) totaling $3,272.64. According to the Merchant Agreement, the Purchase Amount is $21,000.00. As such, $21,000.00 - $3,272.64 = $17,727.36. I'm not sure where you arrived at a balance of $22,477.00.
When time came upon the 1880’s, the lumber industry hit its high point. The industry really focused and invested seriously into it. In the same time span,
The first computation that is needed is the Average collection period (ACP) see figure 1. Which is interred related to average accounts payable period (APP) see figure 2. the ACP is a simple equation that allows the firm to have a good idea about how long on average there accounts receivables takes to get collected. In order to solve for this equation we must know that the denominator is simply sales divided by accounts receivables then we divided the days in sales over our first computation and get the ACP. The APP was given in the case but it is a good idea to understand what this formula is doing and why the number is important to us as you see In figure 2 it is a pretty straight forward formula where we take inventory period and add average collection period the formula computed above a subtract our cash cycle form that. The APP is important because it allows the firm to know the average time it takes them to pay
Butler Lumber Company, a growing profitable business has exhausted its credit limit and the key issues facing it are: 1. Need for additional funds to continue the growth 2. Need to consolidate debt 3. Need to improve cash flexibility.
I am assuming the company will have a minimum balance of $35.00 with a new loan of $140.
As for Accounts Receivable we need to take a look at the ratio called Days Sales in Receivables which is 365 / Receivables Turnover. This is also given to us as 157 days which means that it will take 2.32 times for the company to cover its accounts receivable and