Clarkson Lumber Company

Please read the case “Clarkson Lumber Company”, and finish the following questions:

1. Please finish the following common-size financial statements and financial ratios

Common-size income statement (10%)

2009 2010 2011

Net sales 100% 100% 100%

cost of goods sold 75.4% 75.8% 75.8%

Gross profit 24.6% 24.2% 24.2%

Operating expenses 21.3% 20.6% 20.6%

Earnings before interest and taxes 3.3% 3.6% 3.4%

Interest expense 0.8% 1.2% 1.2%

Net income before income taxes 2.5% 2.4% 2.2%

Provision for income taxes 0.5% 0.5% 0.5%

Net income 2.1% 2.0% 1.7%

Common-size balance sheet (10%)

2009 2010 2011

Cash 4.7% 4.5% 3.4%

Accounts receivable, net 33.3% 35.5% 37.0%

Inventory 36.7% 37.3% 35.9%

Current assets 74.6% 77.4% 76.3%

Property, net 25.4% 22.6% 23.7%

Total assets 100% 100% 100%

Notes payable, bank - 5.2% 23.8%

Note payable to Holtz, current portion - 8.6% 6.1%

Accounts payable 23.2% 29.4% 30.7%

Other current liabilities 4.6% 3.9% 4.6%

Term loan, current portion 2.2% 1.7% 1.2%

Current liabilities 29.9% 48.8% 66.5%

Term loan 15.2% 10.4% 6.1%

Note payable to Holtz, long-term portion - 8.6% -

Total Liabilities 45.2% 67.8% 72.6%

Net worth 54.8% 32.2% 27.4%

Total liabilities and Net Worth 100% 100% %

Financial ratios (Please use the year-end amount.) (10%)

2009 2010 2011

Asset management

Days’ sales in receivables 38.24 43.14 48.95

Days’ sales in inventory 55.90 59.87 62.58

Days to pay payables 35.19 45.47 40.09

Fixed asset turnover 12.54 13.27 11.65

Total asset turnover 3.18 3.01 2.76

Liquidity

Current ratio 2.24 1.47 1.50

Quick ratio 1.27 0.82 0.61

Profitability

Profit margin 2.05% 1.96% 1.70%

ROA 6.53% 5.88% 4.70%

ROE 11.90% 18.28% 17.15%

Financial leverage

Total debt ratio 0.45 0.68 0.73

Interest coverage 4.22 3.00 2.77

2. Why has Clarkson Lumber borrowed increasing amounts despite its...