Entrepreneurial Finance

Assignment 1 Clarkson Lumber (50 points)

Prepare for the Clarkson Lumber case by competing the "Bacground questions", "S&U
Funds", and "Ratio Analysis" work sheets. You can use Exchibit 1 and Exhibit 2 as
your inputs. Read the instruction carefully.

Background questions 15 pts

S&U Funds 10 pts
Ratios 25 pts
 Let's say you are Mr. George Dodge's assistant who is advising him on Clarkson's loan application decision. Witho
Question 1
the company from a banker's perspective.

One of the most appealing factors is the company's conservative financial management approach. This is evi
risky financial behaviors that could jeopardize its ability to repay loans.
The active involvement of Mr. Clarkson in daily operations and his personal control over every aspect of th
It implies a higher level of accountability and dedication to ensuring the company's financial health, which ultimatel
Attractive
Furthermore, the company's consistent sales performance and established market presence bolster its attrac
its allure as a lending prospect.
Lastly, the favorable feedback from trade letters and suppliers underscores Clarkson Lumber's solid business
reinforcing the company's financial stability and creditworthiness.

Relying heavily on trade credit to manage cash flow and stay within borrowing limits indicates vulnerability to dis
Specializing solely in local retail distribution of lumber products exposes the company to risks associated with
Unattractive
diversification or contingency plans, Clarkson Lumber may struggle to adapt to changing market conditions.
The company's assets, including land and buildings, provide some collateral for loans. However, the absence of s

Document all the loans and debt obligations of Clarkson Lumber mentioned in the case, including past, present, an
Question 2
there is informatio missing for certain loan, just list "unknown".

Loan Lender
Number 1 Unknown; the loan taken to buy out Henry Holtz
Number 2 Suburban National Bank
Number 3 Northrup National Bank
…
 who is advising him on Clarkson's loan application decision. Without any financial analsysis, briefly discuss what aspects of Clarkson Lumbe

any's conservative financial management approach. This is evident from their low operating expenses and prudent control over investme
s ability to repay loans.
ily operations and his personal control over every aspect of the business are highly attractive. This level of engagement demonstrates
dication to ensuring the company's financial health, which ultimately benefits the lender.
performance and established market presence bolster its attractiveness. A reliable revenue stream and loyal customer base engender st

ers and suppliers underscores Clarkson Lumber's solid business reputation. Strong supplier relationships can translate into advantageous
creditworthiness.

sh flow and stay within borrowing limits indicates vulnerability to disruptions in supplier relationships or changes in credit terms. This suggest
of lumber products exposes the company to risks associated with a narrow market focus. Any downturn in local construction or shifts in con
n Lumber may struggle to adapt to changing market conditions.
ngs, provide some collateral for loans. However, the absence of substantial personal investments beyond the business raises concerns

Clarkson Lumber mentioned in the case, including past, present, and future loans. List the lender, loan rate, amount, and terms of the loan. I
list "unknown".

Amount Rate
$200,000 original amount 11%
$399,000 Unknown
a revolving, secured, 90-day note not to exceed $750,000 approximately 11.0% based on early 1996 conditions
aspects of Clarkson Lumber Company's business that are attractive to you and what aspects are unattractive. That is, without crunching num

dent control over investments. Such practices indicate a disciplined approach to managing resources, which is reassuring for a lender. It sug

engagement demonstrates a strong sense of ownership and commitment. From a banker's perspective, having an owner who is deeply inves

ustomer base engender stability and predictability, mitigating lending risks. The prospect of sustained sales growth, supported by historical p

anslate into advantageous credit terms and uninterrupted access to inventory, pivotal for operational continuity. Likewise, satisfied customers

credit terms. This suggests challenges in negotiating favorable terms or accessing alternative financing if needed.
onstruction or shifts in consumer preferences could significantly impact sales and profitability. Without diversification, revenue streams lack r

business raises concerns about lender security. Additionally, Mr. Clarkson's personal guarantee requirement adds further risk, especially in

nt, and terms of the loan. I list the first one as an example. You are expected to finish the rest. Hint: if there is an item you are unsure to inclu

Term
Was repayable in semi-annual installments of $50,000, beginning June 30, 1995
Borrowed in spring of 1996; repayment terms unknown
unknown
is, without crunching numbes, qualatitively discuss what you like and dislike

suring for a lender. It suggests that the company is less likely to engage in

owner who is deeply invested in the success of the business is a positive sign.

supported by historical performance and market demand, further enhances

wise, satisfied customers foster repeat business and positive referrals,

n, revenue streams lack resilience against market volatility. Without

further risk, especially in financial distress or default scenarios.

m you are unsure to include or not, err on the safe side and just include it. If
 Instruction: for each time period, fillin the "cha
cells to fill is part of the test. On row 24, calcu
Balance Sheets at December 31, 1993-1995 (thousands of dollars) Source and Use of Fund Analys
1993 1994 1995 1993 to 1994
Change Source
Cash $43 $52 $56 $9
Accounts receivable, net 306 411 606 $105
Inventory 337 432 587 $95
Current assets $686 $895 $1,249
Property, net 233 262 388 $29
Total assets $919 $1,157 $1,637

Notes payable, bank $0 $60 $390 $60 $60

b
Note payable to Holtz, current portion$0 100 100 $100 $100
Notes payable, trade $0 $0 127 $0 $0
Accounts payable 213 340 376 $127 $127
Accrued expenses 42 45 75 $3 $3
Term loan, current portion 20 20 20 $0 $0
Current liabilities $275 $565 $1,088
Term loan 140 120 100 -$20
b
Note payable, Mr. Holtz 0 100 0 $100 $100
Total liabilities $415 $785 $1,188
Net worth 504 372 449 -$132
Total liabilities and net worth $919 $1,157 $1,637
Total $390
h time period, fillin the "change", "source" and "use" columns. Not all colored cells need to be filled in - choosing which
the test. On row 24, calculate total sources and total uses by summing up your entries in each column.
rce and Use of Fund Analysis
93 to 1994 1994 to 1995 1993 to 1995
Use Change Source Use Change Source Use
$9 $4 $4 $13 $13
$105 $195 $195 $300 $300
$95 $155 $155 $250 $250

$29 $126 $126 $155 $155

$330 $330 $390 $390

$0 $0 $100 $100
$127 $127 $127 $127
$36 $36 $163 $163
$30 $30 $33 $33
$0 $0 $0 $0

$20 -$20 $20 -$40 $40

-$100 $100 $0 $0

$132 $77 $77 -$55 $55

$390 $600 $600 $813 $813

 Fill in colored cells by calcualting selected financial ratios

1993 1994 1995 Average

Percent of sales
Purchases 75.6% 78.5% 79.2% 77.8%
Cost of goods sold 75.4% 75.8% 75.8% 75.6%
Operating expenses 21.3% 20.6% 20.8% 20.9%
Cash 1.5% 1.5% 1.2% 1.4%
Accounts receivable 10.5% 11.8% 13.4% 11.9%
Inventory 11.5% 12.4% 13.0% 12.3%
Fixed assets (net) 8.0% 7.5% 8.6% 8.0%
Total assets 31.5% 33.3% 36.2% 33.7%
Accrued expenses 1.4% 1.3% 1.7% 1.5%
Percent of total assets
Current liabilities 29.92% 48.83% 66.46% 48.4%
Long-term liabilities 15.23% 19.01% 6.11% 13.5%
Equity 54.84% 32.15% 27.43% 38.1%

Selected financial ratios

Current ratio 2.4945 1.5841 1.1480 1.7422
Quick ratio 1.2691 0.8195 0.6085 0.8990
Inv turns 6.5341 6.0972 5.8330 6.1548
Leverage (TL/TA) 0.4516 0.6785 0.7257 0.6186
fixed Asset Turnover 12.5365 13.2710 11.6469 12.4848
Return on assets 0.0653 0.0588 0.0470 0.0570

cash conversion cycle decomposition:

AP days 35.3065 47.1147 40.0818 40.8343
Collection period 38.2369 43.1450 48.9467 43.4428
Inv days 55.8606 59.8633 62.5745 59.4328
Cash Conversion Cycle 58.7909 55.8936 71.4394 62.0413

ROE decomposition:
Profit Margin 0.0205 0.0196 0.0170
Asset Turnover 3.1785 3.0052 2.7605
Leverage (assets/equity(eop)) 1.8234 3.1102 3.6459
ROE 0.1190 0.1828 0.1715
Clarkson Lumber
Exhibit 1 Operating Expenses for Years Ending December 31, 1993-1995, and for First Quarter 1996 (thousands of dollars)

1993 1994 1995 1996 Q1

Net sales $2,921 $3,477 $4,519 $1,062

Cost of goods sold
Beginning inventory 330 337 432 587
Purchases 2,209 2,729 3,579 819
$2,539 $3,066 $4,011 $1,406
Ending inventory 337 432 587 607
Total cost of goods sold $2,202 $2,634 $3,424 $799
Gross profit 719 843 1,095 263
Operating expense 622 717 940 244
Interest expense 23 42 56 13
Net income before taxes $74 $84 $99 $6
Provision for income taxes 14 16 22 1
Net income $60 $68 $77 $5

Exhibit 2 Balance Sheets at December 31, 1993-1995, and March 31, 1996 (thousands of dollars)

1993 1994 1995 1996 Q1

Cash $43 $52 $56 $53

Accounts receivable, net 306 411 606 583
Inventory 337 432 587 607
Current assets $686 $895 $1,249 $1,243
Property, net 233 262 388 384
Total assets $919 $1,157 $1,637 $1,627

Notes payable, banka $0 $60 $390 $399

Note payable to Holtz, current portionb 0 100 100 100
Notes payable, trade 0 0 127 123
Accounts payable 213 340 376 364
Accrued expenses 42 45 75 67
Term loan, current portionc 20 20 20 20
Current liabilities $275 $565 $1,088 $1,073
Term loan 140 120 100 100
Note payable, Mr. Holtzb 0 100 0 0
Total liabilities $415 $785 $1,188 $1,173
Net worth 504 372 449 454
Total liabilities and net worth $919 $1,157 $1,637 $1,627
Exhibit 3 Selected Statistics on Lumber Outlets

Low-Profit High-Profit
Outletsa Outletsa

Percent of sales:
Cost of goods 76.9% 75.1%
Operating expense 22.0 20.6
Cash 1.3 1.1
Accounts receivable 13.7 12.4
Inventory 12.0 11.6
Fixed assets, net 12.1 9.2
Total Assets 39.1 34.3

Percent of Total Assets:

Current liabilities 52.7% 29.2%
Long-term liabilities 34.8 16.0
Equity 12.5 54.8
Current ratio 1.31 2.52
Return on sales (0.7%) 4.3%
Return on assets (1.8%) 12.2%
Return on equity (14.3%) 22.1%

a
Defined as the bottom 25% and as the top 25% of all
contributors, based on return on sales.