Butler Lumber Case Study Solution

Butler Lumber Case Study Solution

Options: The Butler Lumber Company (BLC) could obtain from Suburban National Bank maximum loan of $250,000 in which his property would be used to secure the loan. Northrop National Bank is considering BLC a line of credit (LOC) of up to $465,000. BLC would have to sever ties with Suburban National if they were to have this LOC extended to them.

| 1988 | 1989 | 1990 | 1991Q1 |

EBITDA coverage (times) | 2.5 | 2.26 | 2.15 | 2.1 |

Debt Equity Ratio | 0.55 | 0.59 | 0.63 | 0.67 |

Current ratio | 1.80 | 1.59 | 1.45 | 1.61 |

Quick ratio | 1.37 | 1.09 | 0.67 | 0.54 |

Return on sales (margin) | 1.8% | 1.7% | 1.6% | 1.7% |

Return on assets | 5.2% | 4.6% | 4.7% | 4.9% |

Return on equity | 11.5% | 11.2% | 12.6% | 11.8% |

If I were Mr. Butler’s financial advisor, I would advise him to take the loan in an attempt to grow the business. One alarming fact about his business is the lack of a sales staff, yet the revenue has been able to grow at a fast pace; 18% in 1989, 34% in 1990, 19% in 1991 (projected). By adding another experienced salesman that is working

for a base salary plus commission, they can grow the revenues even more. By having this person work on commission, this will eat into the profit margin for the materials he is selling. But the net impact to the BLC will be positive. I would advise Mr. Butler to select the LOC for up to $465,000 because he can take out as little as he needs. He does not need all $465,000 this quarter, but he may need some in the first and last quarters of the year because he obtains 55% of his revenues in the second and third quarters. So it is strategically important for him to have access to this capital because of the nature of his cyclical business.

As a banker, I would not grant BLC a LOC for $465,000. This is too much for a company this size, and with such little equity. The bank officer was aggressive with the forecast that BLC will have revenues of $3.6 million in 1991. I believe I am aggressive in forecasting they will have $3.2 million in revenue in 1991, $400,000 less than what the bank forecasted. I came up with $3.2m by taking the 1st quarter revenue of $718,000 which is historically

approximately 22.5% of the yearly revenue. Assuming this holds true again in 1991, the annual revenue in 1991 will be around $3.2m. This is a 19% year over year increase in revenue for BLC, which is in line with their year over year growth in 1989, and less than the 34% in the best year, 1990.

The margins are not great for this industry, and BLC is no exception. Even with the excellent