HBC_Butler Lumber Company
1. Why does Mr. Butler have to borrow so much money to support this profitable business?
The company faces a shortage of cash.
Liquidity of the company is bad.
(Liquidity = liquidity asset / liquidity liabilities)
Cash (=$31K) / Short-term liability (=$404K)
Don’t have enough funds available to meet the expected sales target
2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million ($360,000))?
We don’t agree with his estimate. It’s not enough to balance the BS in 1991.
How much? $250.2K (= $247K + $3.2K (=current borrowing + EFN))
[Income Statements]
Expected Growth rate in net sales (1991/1990) = 33.6% (= $3,600K / $2,694K)
Net income in 1991 would be $3,600K (=assumption)
Net income in 1991 would be $58.8K (= $44K*1.336)
[Balance Sheets]
Assets
Total assets in 1991 would be $1,246K (= $933K*1.336) …(1)
Liabilities
Accounts payable in 1991 would be $342K (=$256K*1.336) …(2)
Notes payable, accrued expenses, long-term debt remain the same as Q1 in 1991 …(3)
Total liabilities in 1991 would be $836K (= (2)+(3)) …(4)
Equity
Net worth in 1991 would be $406.8K (= $348K + $58.8K) …(5)
Total liabilities and net worth in 1991 would be $1242.8K (= (4)+(5)) …(6)
EFN (external financing needed) = $3.2K (= (1)-(6))
3. As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan?
I approve Mr. Butler’s loan request.
Condition
We suggest Mr. Butler to reduce accounts receivable and put into cash flow.
The limitation of loan: $250.2K (=it’s enough to the sales forecast)
The security: real property (= $162K in 1991 Q1)
The company faces a shortage of cash.
Liquidity of the company is bad.
(Liquidity = liquidity asset / liquidity liabilities)
Cash (=$31K) / Short-term liability (=$404K)
Don’t have enough funds available to meet the expected sales target
2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million ($360,000))?
We don’t agree with his estimate. It’s not enough to balance the BS in 1991.
How much? $250.2K (= $247K + $3.2K (=current borrowing + EFN))
[Income Statements]
Expected Growth rate in net sales (1991/1990) = 33.6% (= $3,600K / $2,694K)
Net income in 1991 would be $3,600K (=assumption)
Net income in 1991 would be $58.8K (= $44K*1.336)
[Balance Sheets]
Assets
Total assets in 1991 would be $1,246K (= $933K*1.336) …(1)
Liabilities
Accounts payable in 1991 would be $342K (=$256K*1.336) …(2)
Notes payable, accrued expenses, long-term debt remain the same as Q1 in 1991 …(3)
Total liabilities in 1991 would be $836K (= (2)+(3)) …(4)
Equity
Net worth in 1991 would be $406.8K (= $348K + $58.8K) …(5)
Total liabilities and net worth in 1991 would be $1242.8K (= (4)+(5)) …(6)
EFN (external financing needed) = $3.2K (= (1)-(6))
3. As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan?
I approve Mr. Butler’s loan request.
Condition
We suggest Mr. Butler to reduce accounts receivable and put into cash flow.
The limitation of loan: $250.2K (=it’s enough to the sales forecast)
The security: real property (= $162K in 1991 Q1)