Butler Lumber Company

Butler Lumber Company Estimating Funds Requirements (AFN) Prepare a short report (2-3 pages) explaining Butler Lumber’s financial situation. You should consider your audience to be Mr. Butler. Be sure to at least answer the following questions in your report and support your argument with detailed financial models which you will provide to Mr. Butler (via e-mail to Professor Tice) on the project due date along with the report that references your supporting data, addresses the key questions in the case, and outlines a defensible recommendation that Mr. Butler can use in discussions with his bankers. A hard copy of the report and financial analysis should be turned in at the start of class on the due date. Assignment: 1. Compute the relevant ratios for Butler Lumber Company for the years 1988-1990. 2. Prepare a Statement of Cash Flows for the aggregate period 1988-1990 (i.e., use the 1988 and 1990 balance sheets to compute the changes in balance sheet accounts). 3. Based on the work in questions #1 & #2, summarize your major findings. Address the firm’s liquidity, debt management, profitability, asset management, and working capital position. a. Identify any problem areas that you may see. b. Use this analysis to determine why Butler Company is so short of cash despite its record of profitable operations. 3. Do you agree with Mr. Butler’s estimate of the company’s loan requirements, including term and total amount required? How much will he need to borrow to finance his expected expansion in sales? (Assume sales will grow 18% each year in 1991 and 1992 and that Butler Lumber is at full capacity). a. Using 1990 ending balances as starting points, prepare the 1991 and 1992 year-end pro-forma income statements and balance sheets under two scenarios: i. They continue to rely heavily on trade credit (Accounts Payable) as a source of funds. ii. They pay accounts payable promptly (in 10 days) in order to take advantage of the 2% trade discount. b. In choosing between the use of trade credit and bank loans as a source of funds, what should this decision be based on? Be sure to explain this in your report. 4. As Mr. Butler’s Financial Advisor, recommend to Mr. Butler whether he go ahead with OR reconsider his anticipated expansion and his plans for additional debt financing. a. If you recommend going forward with the expansion, indicate if you anticipate that the bank will approve his loan and explain any conditions (covenants) you think the bankers would put on this loan. b. Discuss relevant issues, recommendations, and any necessary changes in Mr. Butler’s business practices your team identified through the analysis (including parts 1 through 4). c. Identify the primary reason why Mr. Butler must borrow money to support this profitable business. Provide specific solutions to help him solve this issue, including the appropriate loan term and any additional sources of funding that he should consider.