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Butler Lumber Company

2015-01-27 - MGT433

Jin Young Han

on 27 January 2015

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Transcript of Butler Lumber Company

Butler Lumber Company
MGT433H5S - Stream 1
Mr. Butler's Request:
To obtain an unsecured line of credit for $465,000
Butler Lumber Company
Founded in 1981
Location: Pacific Northwest
Current operations: Retail distribution of lumber products in local area
Offered quantity discounts and credit terms of net 30 days on an open account
Experiencing rapid growth & anticipates a substantial increase in sales

US Lumber Industry 1985~1990
1991 - Spotted Owl Controversy
Increase in domestic competition and more imports from global competitors
Supplier’s sales dramatically reduced
Economic Recession
• Previous analyst reports: "...an inevitable slump in the timber industry..."
• Interest rates: 9~10%
• Increase in unemployment level
• Decrease in investments
• Decrease in consumer spending

Northrop National Bank Commercial Banking Team:
Thomas Abadir
Salwa Abuamra
Carolina Brennan
Jin Young Han
Dante Lim
Grace Tjandra
Butler Lumber Co.'s
Sustainable Competitive Advantages
Hedged against cyclical industry
Control of operating expenses
Purchase of materials at substantial discounts
Efficient use of employees
Why the Loan?
Dissatisfaction with SNB's terms
Max $250,000
Cash Shortage
Pay off Stark's Share
Investments in working capital
Profitability Ratio Analysis
Efficiency Ratio Analysis
Insignificant change in Gross Profit Margin
Increasing Operating Margin by 1% per year
Decreasing Asset Turnover ratio by 1% per year
Decreasing Inventory turnover ratio by 6% per year
Liquidity Ratio Analysis
Decreasing Current Ratio by 11% per year
Decreasing Quick Ratio by 14% per year
Decreasing Cash Ratio by 23% per year
Leverage Ratio
Increasing Debt Ratio by 9% per year
Increasing in Debt-to-Equity ratio by 27% per year
Decreasing Interest Coverage Ratio by 18% per year
Butler Lumber Co.'s 4-Year
Financial Analysis

Increasing Return on Equity by 5% per year
Decreasing Return on Assets by 10% per year
Decreasing Return on Sales by 9% per year
Increasing Return on Invested Capital by 18% per year
Increasing Return on Investment by 8% per year
Cash Conversion Cycle
DuPont Analysis
Decreasing Profit Margin by 9% per year
Decreasing in Total Asset Turnover by 1% per year
Increasing Equity Multiplier by 16% per year
Increasing ROE by 5% per year
Reject previously discussed line of credit for $465,000 under the current financial conditions
Proposal to Alternatives and Revisions in Loan Arrangement
More efficient inventory management system
Faster collection on Accounts Receivables
Significantly reduce Accounts Payables
Cut in Mr. Butler's annual salary and perquisite consumption
Based on the conservative forecast, i.e. projected Sales of $3.128 million used instead of $3.6 million
Interest rate of 10.5% offered by NNB maintained throughout 1991
Majority of Income Statement and Balance Sheet items consistently projected based on the average growth rates from 1988 and 1990
The existing loan of $247,000 from SNB and Trade Note Payables of $157,000 to be refinanced by NNB
Projected Net Financing Requirement of $433,000 for the entire 1991
Increasing Days Sales Outstanding by 3% per year
Increasing Days Inventory Outstanding by 6% per year
Increasing Days Payables Outstanding by 6% per year
Overall, steady increase in Cash Conversion Cycle by 4% per year
Decision Criteria
Positive signs
Increase in ROI and ROIC but decline in overall profitability
Negative Signs
Deteriorating liquidity and increasing leverage put pressure on its ability meet the short-term debt obligations
Increasing Cash Conversion Cycle translates into higher number of days to which the firm's cash is tied
Decreasing operational efficiency - e.g. inventory turnover ratio
Moderate change in ROE supported by substantial increase in Equity Multiplier
Full transcript