1. Identify the key problem in the case and explaining why it is the key problem. Clarkson Lumber Company’s biggest problem by far is the fact that Mr. Clarkson had agreed to buy out Mr. Holtz for $200,000 with semi-annual installments of $50,000. It wasn’t necessarily a bad idea for Mr. Clarkson to buy out Mr. Holtz altogether, but the $100,000/year of payments is an unrealistic amount for Clarkson Lumber at this point in time. Between 1993 and 1995, there hasn’t been a year where they have realized more than $77,000 in net income, so the payment of $100,000/year is clearly unrealistic and a sure problem for the company. Another problem, which isn’t nearly as important as the former, is that net income is growing Multiplying this value by 2% saves Clarkson Lumber $69,200. This is a substantial amount of money for Clarkson Lumber because it makes up a significant portion of their net income for 1996. 5. Do you agree with Mr. Clarkson’s estimate of the company’s loan requirements? How much will he need to finance the expected expansion in sales to $5.5 million in 1996, and to take all trade discounts? My pro forma balance sheet and income statement can be found attached to this document. Based on this analysis, I found that Mr. Clarkson had overestimated the company’s loan requirements for 1996 to finance the expected expansion. This is likely because Mr. Clarkson had not anticipated to take advantage of the trade discounts offered by their suppliers. If they take into consideration these discounts among other projections reflected in my pro forma statements, its reasonable to conclude that the company will only need to borrow approximately $676,000 from Northrup National Bank. This is assuming that they have not yet made payments to the debt owed to Suburban Bank. Because we didn’t know the loan terms with Suburban, I couldn’t determine what portion of that debt is paid off during the year 1996. 6. As Mr. Clarkson’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt
