Clarkson

Landon Cross

6-8-2010

FIN 4422

Clarkson Lumber

Executive Summary

After review of the Clarkson Lumber Company, it is evident that positive free cash flows are not being generated regardless of growth. My analysis revealed that low growth of the company-table 2 created the most ideal outcome regarding free cash flow.

My recommendation is to take the entire line of credit offered by Northrup bank and use it to gain larger quantity discounts from their suppliers. Their current cost of goods sold is around 75% of sales creating insufficient operating cash flows. Despite the relatively efficient control of expenses by Mr. Clarkson, the current financial obligations to Suburban National Bank and Mr. Holtz are the cause of the negative cash flows. The note to Mr. Holtz will be paid off by 1996, and if no additional debt is incurred positive cash flows will be produced. If Clarkson Lumber continues to grow at the current rapid pace-table 1, it produces the least favorable outcome due to the increase in working capital and capital expansion. The other two more likely scenarios-table 2&3, show promising future free cash flows due to the lower costs of capital to maintain the reasonable growth rates, and because the principles on the notes payable are declining.

It is inevitability that Clarkson Lumber will start producing positive free cash flows, as long as their growth rate stabilizes at a more reasonable rate-table 2&3. My recommendation is aimed at producing those positive free cash flows sooner, and the increase in quantity discounts will lower the cost of goods of sold and offset the financial obligations. If the $750,000 line of credit is extended by Northrup Bank, then debt and interest expenses will increase. This creates even more of a necessity to apply the increase in available credit in such a way that will reduce costs. Clarkson Lumber competes on price, so lowering their costs is the only way to improve their margin, and...