Clarkson Lumber Case Week 11 April 4 2006

Clarkson Lumber Case Week 11, April 4, 2006 J. K. Dietrich - FBE 532 – Spring, 2006

Clarkson Lumber Performance u ROE increases from 1993 to 1995 from 11. 9% to 17. 15% – Good? Benchmarks? – Causes? u Margin constant about 3. 3 to 3. 4% u Turnover falling from 3. 2 to 2. 8 u Difference is leverage, up from 1. 82 to 3. 64, I. e. doubled (note net worth) J. K. Dietrich - FBE 532 – Spring, 2006

Look at Cash Flows for Clarkson u Piece together from ‘ 93 to ‘ 96 financials: ‘ 93/96 -I Cash from operations $ 210 - Capital spending 151 - Increase in net W/C 567 - Cash to Holtz 100 Total Cash needed $ 608 u Where has cash come from? Total liabilities up $ 758, 000 J. K. Dietrich - FBE 532 – Spring, 2006

Analysis of Working Capital u Days in accounts receivable up from 38 to 49 days u Inventory turnover down from 6. 5 to 5. 8 u Accounts payable days increase from 35 to 53 days, and missing 2% discounts u To receive 2% discount, pay in ten days, means with 1996 sales estimated at $5. 5 million is 10/360 x $ 5. 5 = $ 115, 000 J. K. Dietrich - FBE 532 – Spring, 2006

Projected 1996 Balance Sheet J. K. Dietrich - FBE 532 – Spring, 2006

Reliance on Creditors u Note costs of losing 2% discount from not paying within 30 days u Paying accounts receivable within 10 days implies increased profit of 2% times costs of goods or $82, 000 for only or $487, 000 $115, 000 or $372, 000 in financing u Why does Clarkson need so much? – Income is not cash – Growth is fast J. K. Dietrich - FBE 532 – Spring, 2006

Financing Growth u Sustainable growth model suggests that with current characteristics (T, L, p, d) Clarkson can only grow 13 to 14% u 1996 growth forecasted at 22% u Last two years’ growth 24% u Required equity at end of 1996 (about $720, 000) to leverage at 1995 level requires about $265, 000 new equity, more that expected profits of about $90, 000 J. K. Dietrich - FBE 532 – Spring, 2006

Mr. Clarkson’s Dilemma u Growth – Inventories and accounts receivables eat up cash – Payables are expensive – Profits not high enough to finance growth u Options facing Mr. Clarkson – Slower growth – Higher leverage and financial risk – Outside investors and dilution of control J. K. Dietrich - FBE 532 – Spring, 2006