Clarkson Lumber

Mod B – Corporate Finance

Case Study: Clarkson Lumber Company

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Clarkson Lumber Company

In 1996, upon projection of a further increase in sales for the incoming spring, Clarkson Lumber had the need to find additional capital to finance an increase in working capital. The company was already financed by Suburban Bank for a maximum of $ 400,000, which was not enough to get accounts payable fall financed within the 2% discount within 10 days.

Clarkson also had Northrup National Bank as a possible choice to evaluate. Northrup offered a 90 day revolver note for a maximum of $750,000, at 11% EAR (or 2% above PRIME).

Clarkson Lumber had been founded in 1981 as a partnership by Mr. Clarkson and Mr.Holtz. Its business was located in Pacific Northwest and consisted of the retail distribution of lumber products. Typical products were plywood moldings and sash and door products, mainly for repairing business (less affected by economic downturns). In 1995 Mr. Clarkson bought out Mr.Holtz’s interest for $ 200,000, thus becoming the sole owner and president of the company. Mr. Clarkson agreed to take over Holtz’s interest by a note to be paid off by 1995-1996. Mr. Clarkson was known for his strong commitment to control the business personally, to work hard and to pay attention to suppliers/creditors.

As evident in the Exhibit 1, throughout the years 1993-1995 Clarkson Lumber Company experienced a strong growth in sales, with a 17.6% increase Y/Y forecasted for 1996. Clarkson’s Gross Margins were quite stable around 25%. They were positively affected by low Depreciation & Amortization costs, but strongly and negatively affected by the Trade Credit management. In fact, Clarkson had almost never paid by the discount term of 10 days, which would have given a 2% discount according to the Trade Credit terms offered by its suppliers (2/10 – Net 30).

That corresponded to carry on a cost...