Clarkson Lumber Company

The answer depends on the degree to which Clarkson relies on using trade credit as a source of funds. As exhibit 2 shows,

Clarkson has waited for about 35 to 54 days to pay his suppliers. If Mr. Clarkson is offered a discount of 2 % for a payment

made in 10 days and he does not pay until 50 days, what interest rate is he forgoing ? On a purchase of $ 1000, he either pays

$ 980 in 10 days or $ 1,000 in 50 days. He thus pays $ 20 for the use of $ 980 for 40 days which is 2.04 % for 40 days, or

about 18.6 % annual.

This cost may be overstated. Clarkson may be taking part of his discounts and extending other payables beyond 50 days out;

such a policy would reduce costs shown. Also, if Mr. Clarkson could delay payment on his purchases for more than 50 days

without incurring punitive action, the cost is over stated.

In a similar vein, Mr. Clarkson may offer his customers a 2 % discount for payment in 10 days, net 30 days. Collection

periods on a/c receivables has been 38 to 49 days. This cost comes to 31 % annual ( HW: calculate this #)

kClarkson Lumber Case

1. Briefly, what is Clarkson’s business, in what stage is Clarkson in its development, and what are its future plans? What are the key notable features of its operations? How has Clarkson fueled expansion in the past?

Clarkson’s operations were limited to the retail distribution of lumber products in the local area. Typical products included plywood moldings and sash and door products. Clarkson Lumber is a company experiencing rapid growth but with a constant cash flow crisis. For its future plans, the company needs more loans to increase its cash liquidity. The key notable features of its operations are that it has low operating expenses, a small staff, and strong management. The overall impression is one of a conservative, efficient operation. Clarkson himself leads a frugal lifestyle with little personal debt. The company has funded its growth with accounts payables.

2. What is Clarkson’s...