Clarkson Lumber Case
Week 11, April 4, 2006
J. K. Dietrich - FBE 532 – Spring, 2006
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)
J. K. Dietrich - FBE 532 – Spring, 2006
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
J. K. Dietrich - FBE 532 – Spring, 2006
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
J. K. Dietrich - FBE 532 – Spring, 2006
Projected 1996 Balance Sheet
Cash
AR
Inv
CA
NP
Tot Ass
NP-Bk
TP
AP
AccExp
TermLoan
CL
Tloam
Holtz
New Loan
Tliab
NW
J. K. Dietrich - FBE 532 – Spring, 2006
10
738
708
1456
380
1836
399
0
115
70
20
604
80
0
433
1117
719
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
J. K. Dietrich - FBE 532 – Spring, 2006
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
J. K. Dietrich - FBE 532 – Spring, 2006
Mr. Clarkson’s 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
J. K. Dietrich - FBE 532 – Spring, 2006