Lecture3 - clarkson lumber

Bankdebtincreasedfrom60in1994to390 thousandsin1995

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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 Sales – 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 request? request? 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) Capital Expenditures 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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