Butler Lumber Company (Case Study)
BUTLER LUMBER COMPANY CASE REPORT
Francis Davidson Tanguay
Paula Zalba
Dounia Tazimezalek
Carl Helou
Applied Corporate Finance
Larbi Hammami
McGill University, Montreal
Tuesday, May 14th, 2013
1. Problem
1.1 Why was sales growth so robust, but net income growth anemic at best?
1.2 Does Mr.Butler need additional funding to fuel his growth?
1.3 Why does butler lumber have a cash shortage problem to begin with?
1.4 Could the cash flows of Butler Lumber support additional debt?
1.5 Should butler lumber sever ties with SNB in order to obtain a larger loan from NNB ?
1.6 Are there alternative solutions to Butler lumber cash shortage problem ?
2. Options
2.1 Status quo.
2.2 BLC severs ties with SNB and obtains a credit line from NNB.
2.3 SNB finds alternative sources of short term funds.
3. Recommendation
BLC should sever ties with SNB and obtain a credit line from NNB.
4. Analysis Projected income statement for 1991:
Beginning inventory was pulled from the previous year's ending inventory. Purchases were projected from a trend of 75.61% of sales for the previous 3 years. The total cost of goods sold assumed the previous 3-year average of 71.93% of sales would continue. Provision for income taxes was calculated as 15% for the first $50 income, 25% for the second $25 income, and 34% for above $75 income.
Projected Balance Sheet for 1991:
The balance sheet was created by disregarding the fact that butler lumber company needs additional loan. Cash, accounts receivables as well as net property plant were computed based on the average % of sales of the 3 previous years. The same idea was used to determine the projected accounts payables and accrued expenses. Net worth of Butler Lumber Company was net worth from the previous year and net income from the projected income statement for the last 1991. Based on the pro forma income statement and the balance sheet, it was
Francis Davidson Tanguay
Paula Zalba
Dounia Tazimezalek
Carl Helou
Applied Corporate Finance
Larbi Hammami
McGill University, Montreal
Tuesday, May 14th, 2013
1. Problem
1.1 Why was sales growth so robust, but net income growth anemic at best?
1.2 Does Mr.Butler need additional funding to fuel his growth?
1.3 Why does butler lumber have a cash shortage problem to begin with?
1.4 Could the cash flows of Butler Lumber support additional debt?
1.5 Should butler lumber sever ties with SNB in order to obtain a larger loan from NNB ?
1.6 Are there alternative solutions to Butler lumber cash shortage problem ?
2. Options
2.1 Status quo.
2.2 BLC severs ties with SNB and obtains a credit line from NNB.
2.3 SNB finds alternative sources of short term funds.
3. Recommendation
BLC should sever ties with SNB and obtain a credit line from NNB.
4. Analysis Projected income statement for 1991:
Beginning inventory was pulled from the previous year's ending inventory. Purchases were projected from a trend of 75.61% of sales for the previous 3 years. The total cost of goods sold assumed the previous 3-year average of 71.93% of sales would continue. Provision for income taxes was calculated as 15% for the first $50 income, 25% for the second $25 income, and 34% for above $75 income.
Projected Balance Sheet for 1991:
The balance sheet was created by disregarding the fact that butler lumber company needs additional loan. Cash, accounts receivables as well as net property plant were computed based on the average % of sales of the 3 previous years. The same idea was used to determine the projected accounts payables and accrued expenses. Net worth of Butler Lumber Company was net worth from the previous year and net income from the projected income statement for the last 1991. Based on the pro forma income statement and the balance sheet, it was