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Clarkson

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COMM 371, Lecture 6

COMM 371, Lecture 6

Lecture 6: Financing Growth – The Clarkson Lumber Case Outline for Today (Clarkson Lumber) • Case objectives • Understand what drives the need for cash: Clarkson needs cash, but has a good record of profitability • Evaluate Clarkson’s loan requirements and ability to repay • Link the short-term financial plan to evaluating the firm’s long-term goals • Practice basic skills in financial analysis • Review facts of case • Construct statement of cash flows • A closer examination of working capital • Analysis of fixed assets • What factors contribute to a need for cash? • Evaluating the “financial strength” of Clarkson • Clarkson’s sustainable growth rate • How much does Clarkson pay for AP financing? • Evaluate Clarkson’s need for bank financing and ability to repay • Long-term strategy

Case Facts • Rapid growth in business during recent years (1993-1995). Sales expected to reach $5.5 million in 1996 (+22% vs. previous year) • Profits in 1995 $77 thousands (+13% vs. previous year) • Clarkson is currently at the limit of its current bank borrowing ($400,000) • How quickly has Clarkson’s borrowing escalated? • Bank debt increased from $60 in 1994 to $390 thousands in 1995 • Growth in accounts payable and in notes payable, trade • Why? Buyout: • Clarkson is paying his purchase of Holtz’s stake. • Growth in NWC requirements • 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

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COMM 371, Lecture 6

COMM 371, Lecture 6

Why does a profitable firm like Clarkson need to borrow money?

• Sales • Competes heavily on price • Gives quantity discounts • Net 30 days credit terms • Majority of sales...

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