Clarkson Lumber Co.

Clarkson Lumber Co. 1. Why does Mr. Clarkson have to borrow to support this profitable business? A. This company now faced the cash shortage trouble which we can see from its liquidity, such as current ratios, quick ratios and return on sales for these three years, following a decreasing trend. From accounts receivable statistics, we learn the cash inflows is decreasing since it takes longer time to collect the money from customers. And they still need to pay for purchases, so borrowing from banks can destress the cash shortage pressure and expand their sales to a new extent. B. This company was founded as a partnership and Mr. Clarkson bought out Mr. Holtz’s interest for $200,000 in 1994, which means he doesn’t like more partners to participate in and he wanted the whole control of the company. So raising funds from other people is not what Mr. Clarkson prefers. As for the possibility of raising funds by Mr. Clarkson himself, it is not available since he had no sizable personal investment except for the half interest of the house worth about $85,000. Which means borrowing is the only way to expand at that time. C. Sales volume had been partly built up by quantity purchase of materials at substantial discounts, so Mr. Clarkson would prefer to adopt this strategy in the near future again to gain profits. Therefore, borrowing money to purchase raw materials can reduce the costs substantially.

2. Do you agree with this estimate of the company’s loan requirements? Assume a 1996 sales volume of $5.5 million.

3. As Mr. Clarkson’s financial advisor, would you urge him to reconsider his anticipated expansion, or his plans for additional debt financing? As a banker, would you approve Mr. Clarkson’s loan request and if so, what conditions would you put on the loan?
Funding from banks has its potential risks. It increases the reliance on bank financing. Also, the requested line of credit is insufficient to permit taking the available trade