Butler Lumber Co.
Reason for borrowing fund for the profitable business
Even though the company is profitable, Butler is looking for the funds from the market to meet the capital needs. The company operation is increasing and the company needs to support its operating activities. In addition to this, the company must hold sufficient cash to provide flexibility in the company as well as for the consolidation of the outstanding debt; Butler is seeking for the funds from the market. The careful evaluation of business shows that the company is expanding its business and there is the need of funds to meet its short-term obligations to meet its expansion goal. Apart from this, the company’s historical data shows that its inventory turnover is decreasing from the year 1988 to 1990. So, there is a shortage of operating capital often called as working capital. So, though the business is profitable, it has become very important for Butler to obtain the loan to support its operation and maintain the sufficient working capital. Apart from this, the issue of cash flexibility has also been the matter of concern for Butler because the company has huge portion of outstanding debt. If we base out analysis in the theory, the company does not need any additional money to meet its sales in the year 1991. Mark also bears the capacity to pay its debt of $43,000 as reflected in the balance sheet. However, there are leverage benefits of borrowing the cash from the market. The company can increase its flexibility for the cash and consolidate its outstanding debts at the lower rate of interest.
Estimation of Butler Lumber Company’s short-term loan’s requirements
According to the evaluation and analysis, the forecast made by Butler Lumber Company about the loan requirement for the short-term to be very appropriate. The pro-forma balance sheet of 1991 shows that the Butler Lumber Company has the total bank notes payable amounting to $393,000. This amount of the company’s short-term loan would be very helpful in expanding its business as well as payoff the trade debt of the company. Furthermore, for the quarter of spring, the amount of $465,000 is not necessary to the business because the company generates its major portion of revenues from the second and the third quarter. The surplus money generated in the second and the third quarter can be used to support the business of the first and the last quarter.
Q. As Mr. Butler’s financial advisor, would you give urge him to go ahead with, or reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan?
The maximum amount of loan possible for Butler Lumber Company (BLC) to acquire would be $250,000 from Suburban National where property would be used for securing the loan. BLC is offered a line of credit worth $465,000 for which BLC would have to cut ties from Suburban National.
