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Clarkson Lumber Case

Clarkson Lumber Case. Week 11, April 4, 2006. Clarkson Lumber Performance. ROE increases from 1993 to 1995 from 11.9% to 17.15% Good? Benchmarks? Causes? Margin constant about 3.3 to 3.4% Turnover falling from 3.2 to 2.8

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Clarkson Lumber Case

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  1. Clarkson Lumber Case Week 11, April 4, 2006

  2. Clarkson Lumber Performance • ROE increases from 1993 to 1995 from 11.9% to 17.15% • Good? Benchmarks? • Causes? • Margin constant about 3.3 to 3.4% • Turnover falling from 3.2 to 2.8 • Difference is leverage, up from 1.82 to 3.64, I.e. doubled (note net worth)

  3. Look at Cash Flows for Clarkson • 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 • Where has cash come from? Total liabilities up $ 758,000

  4. Analysis of Working Capital • Days in accounts receivable up from 38 to 49 days • Inventory turnover down from 6.5 to 5.8 • Accounts payable days increase from 35 to 53 days, and missing 2% discounts • 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

  5. Projected 1996 Balance Sheet

  6. Reliance on Creditors • Note costs of losing 2% discount from not paying within 30 days • 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 • Why does Clarkson need so much? • Income is not cash • Growth is fast

  7. Financing Growth • Sustainable growth model suggests that with current characteristics (T, L, p, d) Clarkson can only grow 13 to 14% • 1996 growth forecasted at 22% • Last two years’ growth 24% • 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

  8. Mr. Clarkson’s Dilemma • Growth • Inventories and accounts receivables eat up cash • Payables are expensive • Profits not high enough to finance growth • Options facing Mr. Clarkson • Slower growth • Higher leverage and financial risk • Outside investors and dilution of control

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