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Unformatted text preview: ng ($400,000)
How quickly has Clarkson’s borrowing escalated?
– Bank debt increased from 60 in 1994 to 390 thousands in 1995
– Growth in A/P and in Notes payable, trade.
What drives the need for cash?
– Buyout: Clarkson is paying his purchase of Holtz’s stake
– Growth in NWC requirements
7 Current Strategy:
So far: forced to forego trade discounts and rely on bank borrowing. Current bank now requires collateral, so explore other possibilities
Clarkson’s objective: with extra financing, the firm can improve profitability by taking advantage of trade discounts on its purchases
Proposed borrowing is a revolving, secured, 90day note, limit: $750 thousands. 8 The Company’s Operation
– Competes heavily on price
– Gives quantity discounts
– Net 30 days credit terms
– Majority of sales used in repair work (less sensitive to economy)
– 55% of sales in AprilSeptember (seasonality)
Costs: keeps costs down by purchasing in quantity at discount 9 How will the bank evaluate the loan
How much does he need?
Probable schedule of repayment
Debt position, current ratio, sales prospects. Borrower’s reputation with other firms dealing with Clarkson
Risks, e.g. exposition to overall changes in the economy
10 Why does Clarkson need to borrow money?
Statement of Cash Flows ($000) 1994 1995 68 77 Increase in receivables (105) (195) Increase in inventories (95) (155) Increase in trade payables 127 163 3 30 (70) (157) (29) (126) Operating CF Net Income
Depreciation * (+)
Change in NWC (excl. financing) Increase in accrued expenses
Net cash provided (used)
Net increase in property
Depreciation * () 11 Statement of Cash Flows (cont.)
1994 1995 60 330 (200) 0 Proceeds from buyout financing 200 0 Payment of longterm debt (termloan) (20) (20) Payment of buyout debt 0 (100) Net cash provided (used) 40 210 9 4 Cash at beginning of year 43 52 Cash at end of year 52 56 Cash Flows from Financing
Proceeds from bank loan
Buyout of equity Net increase in cash 12 Analysis of Clarkson’s Financial Situation
Major categories affecting need for cash – Increas...
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- Spring '13