Butler Lumber Company
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It seems to us that Butler has a decision to make. The problem appears to be whether to accept a new relationship or to stay with the present bank under the current borrowing limit. In order to know which solution is better we are going to create a pro-forma balance sheet and an income statement. We are going to look into purchases and calculate the amount, which represents his ten-day spending on purchases. We are going to assume that he lowers his accounts payable to that amount. In order to forecast some of the figures we attached the common size balance sheet and income statement. The sales amount for the year of 1991 are going to be assumed at 3,600,000 while relying on banks estimate.
While projecting the income statement we assumed that the interest for the year 1990 would be comprised of the new loan interest (assume they need the whole amount) at 10.5%. Which is 49,000. Also additional interest we would have to take into consideration is the 11% off of the remaining part of long-term debt, which, as of the end of 1990, equals 50,000. That gives us the interest of off the LTD of 5,500 combined with new loan interest of 49,000 for a total of 54,500.
Largely due to his increased sales our forecast shows that under the same cost assumptions for operating expense and COGS, as well as same levels of ending inventory in relation to sales, Mr. Butler will have a profit of about 46,000 after taxes.
Before we got to forecast a balance sheet we decided to calculate a debt structure under some new assumptions. First Mr. Butler needs to bring his accounts payable closer to reality, as we specified before to a level equal to 10 days of purchases. This would amount to (2,721 est. purch. / 365 days)*10days = 74,540. That meant a reduction from 243,000 (early 1991 level) to 74,540, which was about 168,450. Also notes to his old bank would have to be paid amounting to another 247,000. Finally to bring him up to date on his trade credits he needed to pay another 157,000. All of the above debt that needed to be repaid came up to 572,450. Clearly that creates a problem for Butler since the bank can only allow him a note of 465,000 and he can’t keep his current relationship. In order to bring this company into a good standing Mr. Butler will have to make some personal sacrifices, though they likely will reimburse themselves in the future because he is making more money then he ever did and that is likely to continue. Knowing Mr. Butler’s personal situation I think that it will be best to refinance his home and pull out the equity. We know that his wife has a half interest in the house, which is worth about 55,000 that tell us the entire equity position in the house is about 110,000. Luckily for Mr. Butler his shortage in business “refinancing” is 572,450 — 465,000 = 107,450 which can be covered with his house equity, while Mr. Butler and his family will have the 46,000 profit for their living expenses.
While forecasting the assets part of the balance sheet we saw that Mr.