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 then depict the best approach
of reaching those goals. I would also look at the individual ratios such as return on sales (Net income / Sales), Return on
Equity (Net Income / Last year’s equity, Debt to Equity (Total Liabilities / Equity), Inventory Turnover (Cost of Sales /
Inventory, and others. After looking at the results of the various ratios a person could see how the company stands based on
the industry averages.
As a banker I would like to see both the Pro Forma Balance and Income statements for the Clarkson Lumber Company
before any loan decision would be made. The company also has a good strategy in terms of competing with outlet stores
because of having more inventories in stock and allowing the customers more time to pay for their purchases. Another
positive aspect to Clarkson’s Lumber is that it has good references, which show that business relationships have been stable
and should continue. There is a good buffer of protection if the housing market takes a downturn. The company has a high
percentage of business from repairs, which helps the balance of income.
Pro Forma Balance Sheet1996Cash53Accounts Receivable, net825Inventory917Current Assets1795Property, net384Total
Assets2179Notes Payable399Notes Payable to Holtz, current portion100Notes Payable, Trade127Accounts
Payable573Accrued Expenses96Term Loan, current portion20Current Liabilities1315Term Loan80Note Payable, Mr.
Holtz0Total Liabilities1395Net Worth533Additional Financing251Total Liabilities and Net Worth2179Cash: Taken from
1st quarter of 1996.
Accounts Receivable: (Accounts Receivable/ Sales)1993: 306/2921 = 10.5%1994: 411/3477 = 11.8% (increase of
12.4%)1995: 606/4519 = 13.4% (increase of 13.6%)1996: increase of about 14.5% on 13.4% = 15%15% of sales =
825Inventory: (sales/ inventory turnover)5500/6 = 917Current Assets: cash + accounts receivable + inventoryProperty:
Taken from first quarter of 1996.
Total Assets: current assets + propertyNotes Payable: Same as last year since there is the 400,000 limit = 399Notes Payable
to Holtz, current portion: same as last year because it’s the same portion every year = 100Notes Payable, trade: 127 because
same as last year, because already seriously extended and shouldn’t be extended any moreAccounts Payable: Avg. Accounts
Payable for 1995 was 38 days365/38 = 9.6 times a year.
5500/9.6 = 573Accrued Expenses: previous year + increase in tax expense75 + (43-22) = 96Term Loan, current portion:
same as previous year, always the sameCurrent Liabilities: Total of liabilities so farTerm Loan: Previous year – current
portion100 - 20 = 80Note Payable, Mr. Holtz: Same as previous yearTotal Liabilities: current liabilities + term loanNet
Worth: Previous year’s net worth + net income. Previous Year: 372 (1994) + 77(1995) = 449449 + 84= 533Additional
Financing: Total Assets – Total Liabilities – Net Worth2179 - 533 – 1395 = 251Total Liabilities and Net Worth: Total
Liabilities + Net Worth + Additional Financing = Total AssetsPro Forma Income Statement1996Net Sales:$5,500- Cost of
Goods:Beginning Inventory587Purchases43454932Ending Inventory715Total Cost of Goods Sold4217Gross
Profit1283Operating Expenses1103Earnings before int. & taxes180Interest Expense53Net Income before taxes127Provision
for inc. taxes43Net Income84Net Sales: estimated figure in the Case Study QuestionCost of Goods:Beginning Inventory:
Ending Inventory of previous year.
Purchases: Purchases/Net Sales (previous years)1993: 2209/2921= 0.756*100 = 75.6%1994: 2729/3477= 0.785*100 =
78.5%1995: 3579/4519= 0.792*100 = 79.2%1996 est.: 79% (rounded average for past two years)79% of 5500 (sales) =
4345Ending Inventory: Ending Inventory/ Net Sales (previous years)1993: 337/2921= 0.115 = 11.5%1994: 432/3477=
0.124 = 12.4%1995: 587/4519= 0.130 = 13.0%1996 est.: 13% (because of increasing trend)13% of 5500 (sales) = 715Total
Cost of Goods: (Beginning Inventory + Purchases) – Ending InventoryGross Profit: Net Sales – Total Cost of Goods
SoldOperating Expenses: Operating Expenses/ Gross Profit (previous years)1993: 622/719= 0.865 = 86.5%1994: 717/843=
0.851 = 85.8%1995: 940/1095= 0.858 = 85.8%1996 est.: 86% (because of increasing trend)86% of 1283 (projected gross
profit) = 1103Earnings before interest & income taxes: Gross Profit- Operating ExpensesInterest Expense: Interest Expense/
Total Liabilities (from balance sheet)1993: 23/415= 0.055 = 5.5%1994: 42/785= 0.054 = 5.4%1995: 56/1188= 0.047 =
4.7%1996 est.: 4.5% (because of decreasing trend)4.5% of 1173 (Total liabilities from 1st quarter) = 53Net Income before
income taxes: Earnings before interest & taxes – interest expenseProvision for income taxes: If net income before taxes is
over $100,000 income taxes is 34%. Net income before taxes is 127 and 34% = 43.
Bibliography____________. (1996,October). Clarkson Lumber Company. Boston, MA. Harvard Business School
Publishing.