Butler Lumber Company Case Studies Solution

Butler Lumber Company

Financial Management Case Studies

Group 3 xxx xxx xxx xxx xxx

Issues: • Business Expansion Funds • Choose Short-term Sources of Funds • Creating Value

MAGISTER MANAGEMENT  UNIVERSITAS GADJAH MADA  2011 

FINANCIAL MANAGEMENT CASE STUDIES

Butler Lumber Company

KEY ISSUES

The key issues of this case studies are:

• • • •

Is the funding needs of these companies short‐term or long‐term? Is the funds offering  by Northorp Bank amounting to $465,000 should be accepted by the Butler? Should the butler take the cash discount on trade credit even if it must borrow from the bank? Should Buttler take a loan from the Northorp Bank and make expansion his business? 

ANALYSIS

Income Statement As shown at the income statement that beginning inventory was pulled from the previous year’s ending inventory. Purchases were projected from a trend of 76% of historical sales for the previous 3 years. The total cost of goods sold assumed the previous 3-year average of 72% of historical sales would continue. Provision for income taxes was calculated as 15% for the first $50 income, 25% for the second $25 income, and 34% for above $75 income (scheduled given in footnote 1). See the detailed of income statement projection in table 3. Balance Sheet For this case (see balance sheet projected in table 4), the balance sheet was created with the assumption that Butler wouldn’t take the additional loan. The trend that cash followed from the previous years was used to project the cash asset. Account receivable was based on % of historical sales previous year. Property was expected to increase by 6% based on the previous year’s trends. According to the table 4, accounts payable stayed at 10 days of purchases. Accrued expenses were based on historical 3 years for 1.5% of historical sales. The long-term debt for the purchase of the company would be paid down to $43,000. And net worth of Butler Lumber Company was from the previous year and net income...