...cost of equity. Then we can calculate the present value of the business. (4) Alternatives to intrinsic value are market value and book value. (5) Why Buffett rejects book value and market value: Book value only reflects the past history of a business’s net asset, it does not mean the business’s future earnings. Market value is not stable, it may be larger or smaller than the intrinsic value greatly. Range of possible intrinsic values for GEICO: 125/(1+ 11%)^5) = 74.18 Why the estimated cost of equity is so high? If we use 30 year Are the Forecast stock prices in 2000 right (from 90 to 120)? (3) Are forecast about dividends of GEICO from 1996 to 2000 right or reasonable? (1)Invest on super companies which have competitive advantage in their industry. (2) Margin of safety: the purchase price is much lower than the intrinsic value. (5) Using Discount-Cash-Flow method to calculate the intrinsic value....
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...Subject: Butler Lumber Company Problem: Butler Lumber Company has been experiencing in the past few years a rapid growth of its sales. However, in order to sustain this growth the company also experienced an increase of its inventory and of its accounts receivables leading to a shortage of cash to finance day to day activities. The company therefore needs to find a way to improve its financial flexibility without extending even more its trade credit. Options: 1. Remain with its current bank, the Suburban National Bank, with a credit limit of $250,000. 2. Take the 90-day note ($465k) from Northrop National Bank and deteriorate relations with Suburban National Bank. a. Benefit from the early payment discount b. Do not benefit from the early payment discount 3. Take a line of credit from Suburban National Bank but for a different amount. Recommendation: Ratio Analysis (compare A/R, A/P turnover rate) Our group recommends that Mr Butler puts an end to his relationship with the Suburban National Bank. Butler Lumber Company needs more financial flexibility in order to sustain its growth and the bank is limiting the maximum loan to $250,000. Therefore, we recommend Mr Butler to start working with Northrop National Bank. Based on our EFN calculations we believe that $465,000 is too much for Butler Lumber Company. Indeed, we have found in our 6 scenarios that the maximum amount that Mr Butler could need would be $392,000. Therefore, we recommend Butler...
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...Butler Lumber Company Case Study 3) Butler Lumber’s profitability is very low. Their net profit margin, return on assets and return on equity are all below 0.1. This means that even with high sales, their net income will not go up very quickly and they may want to look into cutting costs. Their liquidity was good for the previous years, however this year has not started out good. The quick ratio has been in decline every year and is starting to get to a very low number. The days payable outstanding has constantly risen to the point where it is no longer acceptable. The current ratio in 1988 was very good. Since then it has also been in decline. This company cannot continue this trend. Asset management has also seen a decline over the past three years. In 1988, days sales outstanding, asset turnover and inventory turnover were all very strong. With the decline, the total asset turnover has dropped below 1 meaning this company is not selling enough. Meanwhile, debt has consistently increased while the times interest earned has steadily decreased. If these trends continue, this company will go out of business. 4) Mr. Butler must borrow money to support his business because his debt to equity ratio keeps going up. In order to pay for this debt he needs to make sales but his “days sales outstanding” ratio is going up as well. He has a high inventory, so the majority of his expenses go into purchasing more inventories. This would be acceptable if his customers were paying off...
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...Butler Lumber Company Financial Proposal Analysis & Conclusions Based on the analysis on Butler Lumber’s financial statements (Exhibit 1), we conclude that, for sole trader companies like this, it has been growing fast for the past years, as shown in an increase of Sales from 19% in 1989 to 34% in 1990. There is also a slow and steady growth in net income. Butler Lumber uses most of its cash in inventory, occupying 179,000 out of 475,000. Also, stocks’ SAF is positive for 1988-1990 and 1990-1991, indicating that the company has too much inventory. Accounts receivable’s SAF of 1988-1990 and 1990-1991 show a considerable increase, therefore we conclude that the company is giving out a significant amount of credit to its customers. We consider BLC a healthy company with increasing current assets, but due to the fact that it is giving out too much credit to customers, plus too much inventory, Butler Lumber has bad liquidity and turnover. Cash’s SAF shows a negative number brought by decrease in liquidity that avoids its use against contingencies and debt repayment. BLC desires to keep a good relationship with its suppliers. However, right now they have given the company a considerable credit for delayed payment. In order to maintain a solid relationship with its partners, BLC is in great urgency to find other financing sources to pay the credit. This is one of the reasons for Mr. Butler’s desire to borrow money, both to expand his business and to pay the liabilities that...
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...Management Case Study 1 Emre BULUT Butler Lumber Company 2056281 | | | | | | | First Quarter | | | | | 1988 | 1989 | 1990 | 1991 | | | | | | | | | | | Current Ratio | (CA/CL) | | 1.80 | 1.59 | 1.45 | 1.35 | | Quick Ratio | ((CA-Inv)/CL) | 0.88 | 0.72 | 0.67 | 0.54 | | Inv. Turnover | (Sales/Inv) | 7.10 | 6.17 | 6.44 | 1.29 | | DSO | | (Rec*365/Sales) | 36.78 | 40.25 | 42.95 | 175.38 | | FA Turnover | (Sales/FA) | 13.47 | 14.38 | 17.16 | 4.43 | | TA Turnover | (Sales/TA) | 2.86 | 2.74 | 2.89 | 0.66 | | Debt Ratio | (TL/TA) | | 54.55% | 58.70% | 62.70% | 67.37% | | TIE | | (EBIT/Int Exp) | 3.85 | 3.05 | 2.61 | 2.10 | | EC | | (GP/Int Exp) | | 36.54 | 28.80 | 22.55 | 19.60 | | PM | | (NI/Sales) | 1.83% | 1.69% | 1.63% | 1.25% | | OM | | (EBIT/Sales) | 2.95% | 3.03% | 3.19% | 2.92% | | GPM | | ((Sales-COGS)/Sales) | 27.99% | 28.61% | 27.62% | 27.30% | | BEP | | (EBIT/TA) | | 8.42% | 8.29% | 9.22% | 1.92% | | ROA | | (NI/TA) | | 5.22% | 4.62% | 4.72% | 0.82% | | ROE | | (NI/Com Eq) | 11.48% | 11.18% | 12.64% | 2.52% | | Questions: 1: Why does Mr. Butler have to borrow so much money to support this profitable business? First of all, company is doing well but it has some problems to compensate their short term liabilities. As CR is examined ratio has a decreasing tendency. This is a pointer of money necessity in company. Also although company has a good inventory turnover which...
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...Butler Lumber Case Management Accounting Case (1) Financial Planning: Butler Lumber Valuation 1. Although Mr Butler has seen an increase in his sales for the last few years, there are a few reasons why he needed a loan from the bank to keep his operations going. 1) Shortage of Cash: Despite good profits, Mr. Butler had experienced a shortage of cash from 1988 to 1990. During this period of time, there was a decrease in cash reserves, as well as in inventory turnover, indicating that Mr. Butler’s money had been tied up in his inventory. This can be resolved by working on his receivables turnover ratio, which decreased from 1988 to 1990, as seen in Appendix A. 2) Debt Consolidation: In late 1988, Mr. Butler took a loan of $70,000 that carried an interest rate of 11%. The annual interest payable to the bank compounded to his cash shortage problem. 3) Expansion of operational business: Additional investments in working capital and inventory purchases will be required to keep up with the company’s increasing sales volume. 2. As illustrated in Appendix B, assuming that 1991 sales volume will be $3.6 million, Butler Lumber will only need a loan of roughly $333,600.00 to finance the expected expansion in sales. The company’s estimate of the loan requirements is inaccurate. 3. In the first quarter of 1990, sales were $698,000, approximately 25.91% of the yearly revenue. Based on this ratio, we estimate that Butler Lumber Company will generate approximately...
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...Butler Lumber Company Introduction Butler Lumber Company was found in 1981 by a partnership of Mark Butler and his brother in law, Henry Stark. In 1988, the business was incorporated after the acquisition of Butler over Stark’s interest. At the same time, the company had shifted from a partnership into a corporation. The company’s operations are about retail distribution of lumber products included plywood, moldings, and sash and door products. During the period of 1988-1990, Butler Lumber Company has proven that it is a profitable company. At the same time, it has a greater capital needs than it should have. Its current maximum loan amount of $250,000 with Suburban National Bank is not sufficient. Furthermore, the company is seeking a line of credit (LOC) from Northrop National Bank with an amount of $465,000 at an interest rate of prime plus 2 percent basis point. The purpose here is assessing the situation from perspective of the owner Mark Butler and the Northrop banker George Dodge. Butler Lumber Company fund-need purposes Estimation of Butler Lumber Company’s short-term loan’s requirements The forecast of Butler Lumber Company’s short-term loan requirements are appropriate. According to Pro Forma Balance Sheet in 1991, the total amount of bank notes payable of Butler Lumber Company is $393,000. This loan amount would help the company to expand its operational business and eliminate its trade debt. The total amount of $465,000 is not necessary...
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...Butler Lumber Case Study Zachary Scott Brown FIN 6420 – Dr. J. Robert Malko February 4, 2012 I: Statement of Financial Problem: Butler Lumber Company, a rapidly growing lumber products and retail distribution organization, faced a critical challenge that would determine its future success and level of profitability. The company, led by its founder Mark Butler, had a bright future as its products were consistently in demand in both the new construction and repair work fields. However, Butler Lumber faced one major challenge. The challenge that the company was experiencing was a shortage of cash due to restrictions set by its current funding source, Suburban National Bank. Due to these restrictions, Butler Lumber began to explore other funding sources in order to enhance its current business model and satisfy the high demand of its products. As a possible solution, Butler Lumber looked to a larger bank, the Northrop Bank, which had the potential to offer the company $465,000, nearly double the amount offered by its current lender, Suburban National Bank. Although the idea of moving to a heavy hitting lender seemed quite appealing, one major financial problem needed to be addressed. The major financial problem facing Butler Lumber was identifying why the forecasted figures shown on the income statement differ from the results provided on the balance sheet. II: General Framework for Financial Analysis: There are several factors that can contribute to discrepancies or inconsistencies...
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...Butler Lumber Case Analysis Question 1 Butler Lumber, a retailer of lumber products in the Pacific Northwest area, experienced a time of growth in the spring of 1991 (Harvard College, 2002, p.1). The company looked to take out a loan to grow business operations. The maximum loan offer from Suburban National Bank was $250,000 (Harvard College, 2002, p.1). This loan also required a pledge of property from company owner, Mr. Butler, to secure it. However, Northrop Bank would offer a loan up to $465,000 (Harvard College, 2002, p.1). If he accepted this bigger loan, he would have to cut ties with Suburban National. Butler’s business ran off the ability to obtain resources at such a low rate by buying high quantity (Harvard College, 2002, p.1). The fact that he was only able to borrow up to $250,000 from the bank decreased his ability to buy more resources at a cheaper price and receive the discounts he needed to increase his profit margins with the growing market. He began the business in debt when he bought his partner’s interest in the company with a note payable and his business continued to have small profit margins due to lack of financing. During the years, Mr. Butler had taken few purchase discounts because of the shortage of funds arising from Stark’s investment and to cover working capital with the company’s expected increase in sales. He is unable to grow his cash flow enough to pay of his debts and this is a very dangerous trend. He...
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...Shumann Butler Lumber Company Background: Butler Lumber Company had been founded in 1981 in a suburb of a large city in the Pacific Northwest. The company s operations were limited to the retail distribution of lumber products. Their typical products included plywood, moldings, and sash and door products. Despite good profits Butler Lumber Company experienced a shortage in cash and found it necessary to increase its bank loans. Issues: y y Why does a Profitable company such as Butler Lumber need external Financing? Should Butler Lumber Company accept the discount that is being offered from its suppliers? y Project the Butler Lumber Company s balance sheet and Income Statement for all of 1991 under two scenarios If they accept the discount If they don t accept the discount Analysis: Butler Lumber Company is a profitable company anticipating tremendous growth, and typical of a company in this phase of the business cycle, the cash needed to meet obligations outstrips its inflow from operations. Butler s exponential growth has caused them to need external financing, because they can t self-fund their working capital needs. The might be able to mitigate some of this through better inventory management control such as squeezing their suppliers on credit terms or for increased volume discounts. Going forward their fixed costs will also help build economies of scale which should diminish their external financing demands in future fiscal periods. Butler is banking...
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...and Recommendations The problem that we have recognized in this case is that Butler Lumber Company does not have enough funds to finance its operations in the future. The company has experienced a shortage in cash and needs to issue debt as it moves forward. The company is also under pressure because of the payment to be made to Mr. Stark for the buyout of his share in the company of $105,000. Although, the majority of this payment has been made, Butler still owes Stark another $35,000 that he intends to finance through another loan. The firm has already been using up its cash reserves to pay back its liabilities, which is not a good sign since cash should be used for investment purposes. As we can see from Exhibit 4 (Cash flow from operations), cash balances have been depleting year by year with a total decrease of $17000 over the years 1988-1990. Butler Lumber has two options to support the company’s operations. The first presents itself in the form of a loan from the Suburban National Bank of $250000, who have asked them to secure the loan with real property, which shows that the company’s risk profile has increased as this bank never asked for any security while making loans in the past. But the problem with this scenario is that the company will need a bigger loan to finance its operations, which the Suburban National Bank will not provide beyond $250000. Therefore another option that the company can consider is to accept Northrop National Banks offer of a loan of $465000...
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...Butler Lumber Case Study I. Statement of Financial Problem Butler Lumber Company, a growing profitable business has exhausted its credit limit and the key issues facing it are: 1. Need for additional funds to continue the growth 2. Need to consolidate debt 3. Need to improve cash flexibility. In this case study I will be discussing following problem: Why has Butler Lumber been profitable in the increasing volume of sales but at the same time it is experiencing cash difficulties in 1988 – 1990? This is a historical problem and my calculations and assumptions are based on income statement and balance sheet for 1988 – 1990. II. General Framework for Financial Analyses There are different financial ratios and questions they answer: • Liquidity ratio – current ratio: Will Butler Lumber be able to pay off his debts as they come due? Satisfactory liquidity ratio is necessary if Butler Lumber is to continue its operations. • Asset management ratio: Does Butler Lumber have the appropriate amount of assets versus sales? How effectively is Butler Lumber managing its assets? • Debt management ration: Does Butler Lumber have the right mix of debt and equity? • Profitability Ratios: Are sales high enough? Do sales exceed the unit cost? It is necessary to calculate different types of financial ratios to examine different aspects of Butler Lumber’s operations. Key accounts for sources of funds for Butler...
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...Why does MR. Butler have to borrow so much money to support this profitable business? Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales? According to the given information in the materials, Mr. Butler expects the net sales in 1991 would be 3.6 million. So the expected growth rate will be 3600K/2679Kx100%=33.6%. EBIT =Net sales-cost of goods sold-operating expense Assuming the cost of goods sold, operating expense will grow in the same rate, from 1988 to 1991, EBIT of Butler Lumber Company was respectively 50, 61, 86 and 115. The growth rate of EBIT was 22%, 41% and 33.7%. Clearly the company is on a fast growing track. At the mean time, we need to know if Mr. Butler has enough money to maintain such a fast growth. Accounts payable in 1991 would be 256K x133.6%=342K If we assuming the notes payable, accrued expenses, and long-term debt is same with first quarter in 1991, total liabilities in 1991 would be 836K The net worth in 1991 would be the net worth in 1990 plus the net income in 1991, the net income in 1991 would be 44Kx133.6%=58.8K, so the net worth would be 406.8K. Total liabilities and net worth in 1991 would be 1242.8K . Total assets in 1991 would be 933Kx133.6%=1246.5K. So there will be 3.7K shortage of fund for the company. Therefore, Mr. Butler needs to borrow money to reach the expected growth and his estimate of the loan requirements was right. The company needs 3.7K...
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...Butler Lumber Company Case Analysis In completing the case, we have consulted only with each other and/or the instructor. Sergei Chunkovsky Hung Nguyen Jeffrey Parrish January 25, 2016 Butler Lumber Company, a lumber company located in the Pacific Northwest, is rapidly expanding and is seeking to borrow more cash to finance its day-to-day operations. However, their current bank, Suburban National, has imposed a limit on their borrowing thus causing Butler to seek funds from another bank, Northrop National. Butler Lumber finds itself in a unique position, as it requires an influx of cash even though sales are growing and the company is generating revenue. Because Mr. Butler wants to take advantage of trade discounts, he uses bank notes to pay his suppliers quickly where he would otherwise be unable to with operating cash flows. As his business grows, he purchases more and more inventory on account, requiring larger amounts of debt to pay off. Under current operating procedure, Mr. Butler will need to find another bank to lend him money so that he can continue to operate his business. Based on current projections, it is estimated that the Butler Lumber Company will need to obtain approximately $215,000 from Northrop National Bank to meet their current obligations. Table 1 shows a detailed pro forma balance sheet for the Butler Lumber Company for the years 1988 through 1991. This $215,000 number is calculated on the assumption that sales for 1991 will be...
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...Accounting Case (1) Financial Planning: Butler Lumber Valuation 1. Although Mr Butler has seen an increase in his sales for the last few years, there are a few reasons why he needed a loan from the bank to keep his operations going. 1) Shortage of Cash: Despite good profits, Mr. Butler had experienced a shortage of cash from 1988 to 1990. During this period of time, there was a decrease in cash reserves, as well as in inventory turnover, indicating that Mr. Butler’s money had been tied up in his inventory. This can be resolved by working on his receivables turnover ratio, which decreased from 1988 to 1990, as seen in Appendix A. 2) Debt Consolidation: In late 1988, Mr. Butler took a loan of $70,000 that carried an interest rate of 11%. The annual interest payable to the bank compounded to his cash shortage problem. 3) Expansion of operational business: Additional investments in working capital and inventory purchases will be required to keep up with the company’s increasing sales volume. 2. As illustrated in Appendix B, assuming that 1991 sales volume will be $3.6 million, Butler Lumber will only need a loan of roughly $333,600.00 to finance the expected expansion in sales. The company’s estimate of the loan requirements is inaccurate. 3. In the first quarter of 1990, sales were $698,000, approximately 25.91% of the yearly revenue. Based on this ratio, we estimate that Butler Lumber Company will generate approximately yearly revenue...
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