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Anthony Corcoran Nazanin Mirshahi Robert Brackmann Peiman Vahdati Eric Shumann

Butler Lumber Company Background: Butler Lumber Company had been founded in 1981 in a suburb of a large city in the Pacific Northwest. The companys operations were limited to the retail distribution of lumber products. Their typical products included plywood, moldings, and sash and door products. Despite good profits Butler Lumber Company experienced a shortage in cash and found it necessary to increase its bank loans. Issues: Why does a Profitable company such as Butler Lumber need external Financing? Should Butler Lumber Company accept the discount that is being offered from its suppliers? y Project the Butler Lumber Companys balance sheet and Income Statement for all of 1991 under two scenarios Analysis: Butler Lumber Company is a profitable company anticipating tremendous growth, and typical of a company in this phase of the business cycle, the cash needed to meet obligations outstrips its If they accept the discount If they dont accept the discount

y y

inflow from operations. Butlers exponential growth has caused them to need external financing, because they cant self-fund their working capital needs. The might be able to mitigate some of this through better inventory management control such as squeezing their suppliers on credit terms or for increased volume discounts. Going forward their fixed costs will also help build economies of scale which should diminish their external financing demands in future fiscal periods. Butler is banking on a tremendous amount of future cash flows to be generated from its assets to help justify its value to shareholders, which is why stakeholders like the bank continue to extend additional credit lines. The company under the without the discount scenario utilized $105K to increase its sales position to maintain its average days sales in cash it managed throughout earlier fiscal periods. A material portion was purposed to support its account receivables which is entirely a function of exponential sales growth. The company maintained its efficiency in cash management during the projected fiscal year, 1991. Inventory also increased $491K, again, a function of its increase in sales growth, while maintaining its average inventory turnover ratio from earlier fiscal periods. Finally, the company needed to fund $247K in Property, net for the purposes of capital expansion to its infrastructure in an effort to support the large top-line growth. Going forward, if the revenue stream reaches a steady state, we would expect the Property, net to remain static, and the need for external financing to greatly diminish, as the company can self-fund its working capital without additional financing. One other reason that the company needs external financing is that Mr. Butler probably wishes to remain the sole owner of the company. Additionally, Mr. Butler has little other family assets to help fund the business. Other than the business, his assets are limited to the equity in his residence. These assets are insufficient to cover the firms

need for additional capital infusion. Mr. Butler has already agreed to a lien against his residence to help shore up the line of revolving credit, so additional internal funding is not feasible at this juncture. Going forward, Mr. Butler may able to help reduce his capital needs, and hence external finance if he is able to more tightly manage his working capital through more efficient turnover ratios. Additionally, as Constant growth in the net sales over the past years we mentioned, he may be able to also strengthen the balance sheet through some long-term debt refinancing (eg- lower fixed rate loans) or through other means such as private equity through affluent investors. Moreover, if the firm continues with its exponential growth the opportunity may present itself to issue more equity to help mitigate some of the leverage currently present in the balance sheet. Our group believes that it would be advantageous for Butler Lumber to elect to take the 2% discount. Butlers source of financing is limited to its newly negotiated banking relationship with Northrop National Bank of $465K. According to Exhibit 1 and 4 you will Net Income $59K or 21%. This was primarily driven from its 2% decrease in inventory purchases. This increased profit on both a pretax and post-tax basis. The increase flowed through to improve owners equity by the same 59K to $643K. This was partially offset by an increase in cash on hand of $18K needed to maintain 2.7% of COGS, a healthy level for the increased payable turnover, see exhibit 3 for more detail. The financial ratios continue to support this argument in exhibit 5, which shows an improvement to its leverage and liquidity ratios as well as the profitability

ratios. For example, the firm improved its ROE by 13.5% to 46%, and its ROA by 25% to 13%. This firmly demonstrates that this decision improved shareholders value. In order to project the pro forma for 1991, a number of assumptions were made; It was assumed that the sales in 1991 was $6 million. The beginning inventory was the ending inventory for 1990. Purchases for 1991 were calculated as a percentage of the average of purchase from 1988 to 1990. The operating expenses of 1991 were computed based on the average operating expenses of 1988 to 1990. Conclusion: Butler Lumber has continued to grow significantly y/o/y and its owner Mark Butler has recently had to absorb the equity buy-out of his partner and brother-in-law, Henry Stark. Marks net worth is primarily illiquid between his residence and the business equity. Therefore, the growth of the firm is being funded through external sources, in this case, a bank loan through Northrop National bank for a revolving line of credit. Our assumptions maintain that Mark continues to manage the company though his strict policies to help maintain its cash management efficiency. Mark faced a rather large financial management decision in terms of deciding whether or not to leverage the 2% credit discount in his A/P invoices. According to our analyses, we are strongly in favor or Mark leveraging the discount, as we feel it will drive improved net income and improve shareholders value.