6315 ClarksonLumber WrittenAssignment
Clarkson Lumber Case Written Assignment
Objective: Analysis of financial statements to assess cash needs, the amount of financing needed, and to consider tradeoffs in growth versus operating decisions.
Written Assignment:
1. What is driving the need to borrow funds to support growth in Mr. Clarkson’s profitable business? Build a sources and uses of cash summary (a summary level cash flow statement) for 1994-1995 showing the total change in sources and uses of cash for both years combined and explain what is driving the need for cash. .)
2. What are the trends in inventory turnover, days in inventory, accounts receivables turnover, and days in receivables ratios for 1993-1995? What is the major driver for growth in inventory and receivables? If you look at 1Q96 data for inventory, how does seasonality impact your analysis?
3. Has the company’s financial condition strengthened or weakened since 1993? Why or why not?
4. Based on the data provided, estimate the sustainable growth rate for 1996 (i.e., the maximum growth rate that can be achieved with no additional equity financing), assuming the company maintains its debt/equity ratio, has no change in the ratio of sales to total assets, does not issue equity, and does not pay dividends. As you will recall from earlier finance courses, the formula is:
i. Sustainable growth rate = ROE x b 1-ROE x b ii. Where b = the retention ratio = [Addition to RE]/[NI] or
= [1- Div/NI]
5. Clarkson does not take advantage of discounts offered by its suppliers. What is the effective annual rate (EAR) they are essentially paying for this? Is the decision to not take advantage of the discount wise? Why or why not? (EAR = [1+ (quoted rate/m)]m – 1, where m is the number of times per year interest is compounded)
6. Project an income statement and balance sheet for 1996 assuming the following:
1. 1996 sales will be $5.5M (as Mr. Clarkson anticipates)
2. All
Objective: Analysis of financial statements to assess cash needs, the amount of financing needed, and to consider tradeoffs in growth versus operating decisions.
Written Assignment:
1. What is driving the need to borrow funds to support growth in Mr. Clarkson’s profitable business? Build a sources and uses of cash summary (a summary level cash flow statement) for 1994-1995 showing the total change in sources and uses of cash for both years combined and explain what is driving the need for cash. .)
2. What are the trends in inventory turnover, days in inventory, accounts receivables turnover, and days in receivables ratios for 1993-1995? What is the major driver for growth in inventory and receivables? If you look at 1Q96 data for inventory, how does seasonality impact your analysis?
3. Has the company’s financial condition strengthened or weakened since 1993? Why or why not?
4. Based on the data provided, estimate the sustainable growth rate for 1996 (i.e., the maximum growth rate that can be achieved with no additional equity financing), assuming the company maintains its debt/equity ratio, has no change in the ratio of sales to total assets, does not issue equity, and does not pay dividends. As you will recall from earlier finance courses, the formula is:
i. Sustainable growth rate = ROE x b 1-ROE x b ii. Where b = the retention ratio = [Addition to RE]/[NI] or
= [1- Div/NI]
5. Clarkson does not take advantage of discounts offered by its suppliers. What is the effective annual rate (EAR) they are essentially paying for this? Is the decision to not take advantage of the discount wise? Why or why not? (EAR = [1+ (quoted rate/m)]m – 1, where m is the number of times per year interest is compounded)
6. Project an income statement and balance sheet for 1996 assuming the following:
1. 1996 sales will be $5.5M (as Mr. Clarkson anticipates)
2. All