Essay about Case Study Butler Lumber

3373 Words Oct 2nd, 2011 14 Pages
Case Study: Capital Budgeting
Butler Lumber Company

Abstract

Butler Lumber Company, a lumber retailer with a rapid growth rate, is faced with the problem of cash flow shortage. In order to support this profitable business, BLC needs a great amount of cash. The loan of $250,000 from Suburban National and a line of credit of up to $465,000 from Northrop National Bank are the two choices provided. After a brief review of the operation and financial conditions of BLC, we first make analysis of the credit level of BLC from the perspective of banker. Although the feedback from all the firms that had business dealings with Butler are quite positive , both solvency and liquidity condition and the mortgage indicates that it is not a wise
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Almost all the trade letter bore out the positive opinion about the operating condition of Butler Lumber Company. They also showed their confidence in Butler’s own credit by mentioning his good personality and the conservative operation he carried out which made the company’s operating expenses as low as possible.

2.2 Financial analysis

After the credit checking of Butler and his company, Northrop National Bank carried out the analysis of Butler Lumber Company’s realistic financial and operating condition by examining its financial reports.

Although the sale prospects were favorable, Northrop National Bank gave particular attention to the long-term solvency measures as well as liquidity ratios of the Butler Lumber Company. Debt position and current ratio of the business were especially carefully examined. Financial ratios using for analysis are shown as the following tables. Financial information used for calculation is drawn from the balance sheet and income statement of the company provided by the case.

BUTLER LUMBER COMPANY

Finance Statements

1988 1989 1990

Liability Rate 54.45% 58.70% 62.70%

Current Ratio 180.00% 158.93% 145.05%

Quick Ratio 88.08% 72.27% 66.92%

Days sales of inventory 62.16 70.77 68.67

Days sales outstanding 35.63 36.51

Days payable outstanding 40.13 41.92

2.1.1 Debt position

According to the capital structure of the

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