Clarkson Lumber Case Study

Clarkson Lumber Company Case Study

To: Mr. Clarkson

From: Clarkson Lumber Financial A-Team

Date: 2/10/11

Subject: Proposed New Bank Loan

After careful analysis of Clarkson Lumber’s income and balance sheets, as well as reviewing industry trends we recommend that Clarkson Lumber leave County National Bank for Northwestern National.

Need for Increased Financing

Our recommendation is based on the company’s need to increase the amount of cash available in order to capitalize on growth opportunities. From 1993-1995, the company’s need for increased financing despite profitability stems from Mr. Clarkson’s buyout of Mr. Holtz’s share of the company, as well as the projected sales growth. Furthermore, it is important for Clarkson Lumber to have access to larger amounts of cash to support its growth both in the short and long term. Their current success is attributed to the ability to compete on price, thus a large growth opportunity exists if they can continue to exploit trade discounts. In the long run the company will clearly need the additional credit, evident by the internal growth rate of 5.87 % and a projected sales growth of 21.17%[1]. The company will also have to slightly alter the debt/equity ratio seeing as the projected growth rate of sales in 1996 is greater than their sustainable growth rate of 19.92%.

Financial Strength

Despite our recommendation that the company seeks to extend its line of credit, we feel that the organization as a whole is in a strong financial condition. In order to determine the stability of the company’s financial position we compared the ratios generated from our income and balance sheets, including the projected figures for 1996, to the upper and lower quartiles of industry averages (for a full list of ratios refer to Exhibit C).

The ratios that we found most integral to our analysis are:

● Current Ratio

Clarkson has a current ratio well below the the lowest quarter of the industry ( 1.16