1.-Why has Clarkson Lumber Company borrowed increasing amounts despite its profitable during the last years?
First of all in 1994 Mr. Clarkson bought the participation to his brother in-law with a value of 200.000$ and he became in the owner of the Clarkson Lumber Company.
That means that he funding all the equity of the company and at the same time he has to pay the part ofHoltz.
Also in this period of three years, (1993 to 1995), it can be seen a rise in net sales around 19.03%, 29.968%. But the increase in the operating expenses was a bigger percentage than in these sales.
Net Profit Margin (NPM):
|NET PROFIT MARGIN |Net Income/Sales |
|1993 |60/2921=0.02054≈2.05% |
|1994 |68/3477= 0.01956≈2% |
|1995 |77/4519=0.017≈1.7% |
(It measures how much out of every dollar of sales a company actually keeps in earnings.This is an indication that costs need to be under better control.)
2.-How has Mr. Clarkson met the financing needs during 1993 and 1995? Has the financial position of the firm improved or deteriorated?
In the period of 1993-1995, the needed of funding was covered with the net worth which was 55% of the company in 1993, the main reason of this higher net worth is the policy of thecompany of retaining the 100% of earnings.
But during the next years this percentage of funding decreased despite of the increment of the net worth in 1994 and 1995. Because of the real financing of the company, the current liabilities, were risen during the period and were without any control too. It can be seen in next table:
|The weight of current |Current liabilities/Totalliabilities and Net |
|liabilities |Worth |
|1993 |275/919=0.2992≈29.9% |
|1994 |565/1157=0.4883≈48.8% |
|1995 |1088/1637=0.6646≈66.4% |
The company uses their current assets to paythe current liabilities but this implicates leverage for the company because their current liabilities have a faster growth than their current assets.
|ACID TEST RATIO |(Current assets-inventory)/current |
| |liabilities |
|1993 |(686-337)/275=1.27 |
|1994 |(895-432)/565=0.82 ||1995 |(1249-587)/1088=0.61 |
Conclusion the financial situation of the company in 1996 getting worse than in 1993.
3.-How attractive is it for Mr. Clarkson to take all trade discount?
To introduce this answer, we must show how was the finance situation during the period studied? The company had a good turnover and financial situation because of thetraditional system that Clarkson used to manage. The problems came when Mr. Clarkson bought Holtz´s part in the company paying 200.000$ between 1995 and the end of 1996, and when sales started to increase the solvent economic situation of the company suffered, with the result of an important increase in the investments in working capital and in payments; the trade discounts disappeared becausethe company started to pay in 30 days or after, instead of before 10 days. The shortage of funds was common and the Trade Credit increases in an important quantity.
The way to know if the trade discount is attractive consists on compare the value of the trade discount whit the alternative way of financing exposed in the Case given.
The minimum cost of these different types of financing will be...