Butler Lumber Company
Background: Butler Lumber Company was founded in 1981, in a large city in the Pacific Northwest. Typical products of the company included plywood, moldings, and sash and door products. After a rapid growth in its business during recent years, the company in the spring of 1991 anticipated a further substantial increase in sales. Despite good profits the company experienced a shortage in cash and found it necessary to increase its bank borrowings.
• Butler Lumber Company is a profitable company. Why do they need external financing?
• Butler Lumber Company is being offered a discount from its suppliers. Should they take the discount?
• Project their Income Statement and balance sheet for all of 1991. …show more content…
Interest expense to be $49 million as the bank loan (PLUG number is lower in without discount case) interest is calculated at 10.5% on bank loan + 11% on long term loan (exhibit 1- assumptions), giving us the figure of $71 million for net income before taxes (exhibit 1), which is lower than the with discount scenario (see exhibit 2 for comparison). Provision for taxes calculated at $12.63 million (see exhibit 1 for calculations under assumptions), this gave a net profit of $58 million (exhibit 1).
In the balance sheet section of the pro forma statement for the year ended 31st December 1991 for without discount scenario, cash to be $50 thousand (given assumption), and accounts receivable calculated @ 11% of sales taken as an average from the previous years (exhibit 3 under A/R as a % of sales). Inventory as a percent of cost of goods sold will grow @22% (an average taken from previous years shows 21.23%, but we assumed it to be 22%, exhibit 3).under the property net head we assume there will be no further investment , as there is restriction put by the bank