Butler Lumber

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Fin 522 Cases in Financial Strategy Group Assignment – Butler Lumber Case
Vedvati Shrotre (shrotre2) Xiaoyue Sun (xsun52) Chenxiao Zhu (czhu19)

1. If the first estimated growth of sales is 30 percent, compare it to the value of the secured 90 day note that Northrup Bank is willing to lend Butler Lumber. What are the results?
Our conclusion is that the new credit line provided by Northrop National Bank would not cover Butler Lumber’s cash shortage under the assumption of 30 percent sale growth rate and 10 days period of payment period to the supplier. We noticed that the cash conversion cycle we have calculated indicates that it takes 15 days longer for the cash to cycle around in 1991 than in 1990. The main cause for this increase is the assumption that the Butler Lumber company pay suppliers in 10 days to gets purchase discount. With the increase in both sales and cash conversion cycle, the shortage of cash will expand. The geometric average sales growth rate for the period 1988 – 1990 is 26.0%, while the geometric average interest expense growth rate is 59.3%. Basically the interest expense is growing at the speed that doubles the growth rate for sales. Given that sales growth rate is 30%, we estimate the interest expense growth rate to be 76.7% and the amount would be 58K. While under the new credit line, the maximum interest expense under fully utilization of the notes payable would be 465k*10.5%+50K*11%=54.33K. Obviously under 30% growth, the new credit line would be not enough to fulfill Butler Lumber's cash shortage.

Fin 522 Cases in Financial Strategy Group Assignment – Butler Lumber Case

2. a. Brief introduction of our analysis:
1. Based on the historical data, we expect the growth rate to be 26% (Exhibit 2) rather than 30% in the previous assumption. 2. Based on the historical data, we set the Payment Deferral Period as 46 days (Exhibit 2) in…...

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