Butler

Butler Lumber Company

Financial Management

Case Analysis AP-17

BACKGROUND

Butler Lumber Company was a growth company in the late 1980. This Company faced tremendous sales growth since it had been founded in 1981 by Mr. Butler and his brother-in-law, Henry Stark.In 1988, Mr. Butler bought Mr. Stark’s share for $105,000 that would be paid off in 1989. For this payment, Mr. Butler has been loan of $70,000 in late 1988. This loan was secure by Butler’s land and buildings, carried an interest rate of 11% and was repayable in quarterly installments at the rate of $7,000 a year over the next 10 years. Mr. Butler was also mortgaged his house for $38,000. Besides that, Mr. Butler held a $70,000 life insurance policy, payable to Mrs. Butler.

Mr. Butler as the owner waslooking for new source of funding by extends his current unsecure bank loan because the company had shown a significant decrease in cash and increase in liabilities over the last three years.The maximum loan that the Butler Lumber Company could obtain from Suburban National was $250,000 in which his property would be used to secure the loan.

George Dodge, an officer of a much larger bank, the Northrup National Bank. He offered Butler Lumber Company a line of credit of up to $465,000. The interest on the new loan would be prime 2%. Butler Lumber Company would have to sever ties with Suburban National if they were to have this LOC extended to them.

CASE RESUMES AND FACTS

BACKGROUND

• BLC had experienced a shortage of cash to expand business

• Its current maximum loan amount of $250,000 with SN Bank

• The NN bank might extend a LOC to BLC up to amount fo $465,000 at an interest rate of prime plus 2%

• BLC obtain rapid increase in sales during 1989 - 1991

• The six months of April – September accounts for 55% of annual sales

• No sales representatives were employed, order by phone

• MB has not wasted his money in disproportionate plant investment

• MB gave attention to control his operating...