Clarkson Lumber Case

1
Clarkson Lumber Case

• Week 11, April 4, 2006

2
Clarkson Lumber Performance

• ROE increases from 1993 to 1995 from 11.9 to
  17.15
• Good? Benchmarks?
• Causes?
• Margin constant about 3.3 to 3.4
• Turnover falling from 3.2 to 2.8
• Difference is leverage, up from 1.82 to 3.64,
  I.e. doubled (note net worth)

3
Look at Cash Flows for Clarkson

• Piece together from 93 to 96 financials
  93/96-I Cash from operations 210
  
  - Capital spending 151
  - Increase in net W/C 567 - Cash to
  Holtz 100 Total Cash needed 608
• Where has cash come from? Total liabilities up
  758,000

4
Analysis of Working Capital

• Days in accounts receivable up from 38 to 49 days
• Inventory turnover down from 6.5 to 5.8
• Accounts payable days increase from 35 to 53
  days, and missing 2 discounts
• To receive 2 discount, pay in ten days, means
  with 1996 sales estimated at 5.5 million is
  10/360 x 5.5 115,000

5
Projected 1996 Balance Sheet
6
Reliance on Creditors

• Note costs of losing 2 discount from not paying
  within 30 days
• Paying accounts receivable within 10 days implies
  increased profit of 2 times costs of goods or
  82,000 for only or 487,000 - 115,000 or
  372,000 in financing
• Why does Clarkson need so much?
• Income is not cash
• Growth is fast

7
Financing Growth

• Sustainable growth model suggests that with
  current characteristics (T, L, p, d) Clarkson can
  only grow 13 to 14
• 1996 growth forecasted at 22
• Last two years growth 24
• Required equity at end of 1996 (about 720,000)
  to leverage at 1995 level requires about 265,000
  new equity, more that expected profits of about
  90,000

8
Mr. Clarksons Dilemma

• Growth
• Inventories and accounts receivables eat up cash
• Payables are expensive
• Profits not high enough to finance growth
• Options facing Mr. Clarkson
• Slower growth
• Higher leverage and financial risk
• Outside investors and dilution of control