Clarkson Company Case Study

Problem Defined:

        The company is seeing growth as evident by the continuous rise in the sales in the period under consideration. But the company has reached a point where the expansion has become difficult due to shortage of cash. Also the owner Mr. Clarkson has bought the share of his partner in the company and he needs to pay for it which has put additional burden on the availability of cash with the company.

        Mr. Clarkson has approached Suburban National Bank for loan but the bank wants personal guarantee by Mr. Clarkson for loan above $400,000. So, Mr. Clarkson has approached another bank Northrup National Bank which can offer loan upto$750,000.

Now Mr. Clarkson wants to determine what is the amount of external fund the firm needed for the expected growth in the sale which can rise to $5.5 million in the year 1996?

And whether the bank should disburse the loan to Mr. Clarkson’s company or not?

EFN:

= (Asset/Sales)*Change in Sales – (Total Debts/Sales)*Change in Sales – Profit Margin *Projected Sales * (1 – Dividend Payout Ratio)

= (1637/1062) * 981 – (1188/1062)*981 – (0.017*5500*(1 – 0))

= 1512.14 – 1097.39 – 93.5

= 321.25

So the external fund requirement for Mr. Clarkson is $3,21,250 for the projected growth in the sales of the company.

IGR:

= (Return on Asset * Retention Ratio) / (1 – Return on Asset * Retention Ratio)

= (0.047 * 1) / (1- 0.047 *1)

= 0.047 / 0.953

= 0.049

= 4.9%

SGR:

= (Return on Equity * Retention Ratio) / (1 – Return on Equity * Retention Ratio)

= (0.17 * 1) / (1 - 0.17 * 1)

= 0.204

= 20.4%

The SGR of the company for the year 1995 is considerably high than that the IGR which tells that the company has additional cash. Also for the past three year SGR is way more than the IGR which is a good sign for the financial health of the company.