J. K. Dietrich - FBE 532 – Spring, 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$ Capital spending Increase in net W/C 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