Butler Lumber Case Study Analysis Essay
Problem: Whether Mr. Mark Butler should go ahead with financing from Northrop National Bank or should stay with Suburban National Bank.
Options: 1) Enter into a loan agreement with Northrop National Bank for USD 465,000 (Assumption: The condition to sever the relationship with Suburban National Bank applies to Short Term Loan only) 2) Continue short term lending relationship with Suburban National Bank for USD 250,000 and secure the company’s loan with real property
Recommendation: Given available data, Butler Lumber …show more content…
Because company’s business is seasonal, the financial opportunities by the new loan offer scope to balance seasonal variations. Another point is the now possible use of discounts provided by suppliers (see Increase in Profitability section).
Ratios (please refer to exhibit ___)
Option 1: If Butler Lumber stays with the old bank we can observe a constant value, from 1990 to 1991, for net working capital, current and quick ratio. At first glance, seems that the firm is able to cover current liabilities with current assets, but, without the inventory (which takes more time to convert into cash), the situation is completely different. The D/E increases from 1,68 to 1,72, while the interest coverage presents a value, that, even if lower, is acceptable. With regard to the profitability, the ROA and the ROE remain constant. The cash cycle increases from 64 to 72: this is due to an increase to both inventory and receivables period, even if we can observe an increase in the payable as well.
Option 2: Taking the new loan lead to an increase in net working capital, mainly due to the reduction of current liabilities (in fact, despite the increase in notes payable, there is a drastic reduction in accounts payable, in order to get the discount). In this scenario both current and quick ratio improve, indicating an improvement in firm’s liquidity. The D/E