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Clarkson Case Solution

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CORPORATE FINANCE ASSIGNMENT
Question No.8:
Increases in working capital requirements have outgrown the capacity of the firm to generate cash internally. Also, part of the funds was used to buy out a partner, further increasing financial pressure. The firm’s accounts payables have been growing and it is borrowing to meet daily needs from the bank so as to maintain its current expansion rate. Mr. Clarkson’s decision today is whether to expand and, if so, how to raise new funds.

Answer:
The loan requirement of $750,000 would be dependent on how Mr. Clarkson uses trade credit as a source of funds. If they don’t take advantage of the trade discount and sell $5.5 million and their % of sales were to remain same for the rest of the items in the balance sheet, they would have more than $298,000 increase in uses of cash. This is not including the previous $399,000 that they have outstanding on the previous line of credit from Suburban bank. If you subtract, you can see that he will already use $697,000 out of their $750,000. Consequently, if they grew at the same rate, they would blow through the $750,000 line of credit too.

As Mr. Clarkson’s advisor, I would advise him to 1. Reduce his liabilities and debt before accruing more and being consumed with payments and interest payments 2. Set a reasonable stock level to control inventory 3. Mr. Clarkson should consider other forms of financing if he wants to continue at the same growth rate 4. Mr. Clarkson should explore the option of equity financing 5. Mr. Clarkson should also let his brother in law keep his share in the business. This will ease off the financial pressure 6. Mr. Clarkson should have stricter policies on his customers 7. The company needs to think of internal funding through a higher profit retention rate
For the banker, until the expansion rate is reduced, there is

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