Case study wilson lumber company article

QUERY 1

WHY HAS PAT LUMBER LENT INCREASING SUMS DESPITE ITS CONSISTENT EARNINGS?

Although the business seems to be rewarding, it has confronted shortage of cash. It happened because of increase in Accounts Receivable as well as Inventories. However, Accounts Payable does not boost that swiftly and troubles regarding cash collection become evident. Furthermore, the cash collection cycle becomes larger (59 days in year 2003, while more than 70 in year 2006).

QUESTION two

HOW HAS MR. WILSON MET THE FINANCING REQUIREMENTS OF THE COMPANY DURING THE PERIOD 2003 THROUGH 2005? HAS THE FINANCIAL STRENGTH OF WILSON LUMBER IMPROVED OR DAMAGED? EVALUATE WILSON LUMBER MONETARY HEALTH.

During 2003- 2005 the organization borrowed money (long term loan) by bank to finance the operations.

Generally speaking profitability proportions are positive, however , could possibly be higher. That could be a signal of cost reduction. On the other hand, the corporation becomes significantly less liquid as well as liquidity proportions keep falling within almost all years. The two liquidity portion inform that there is lack of profit the company.

The leverage ratios display that firm has increased their long term debt and now company becomes more financed simply by debt than equity. Since the debt increases, the interest costs become bigger and thus the eye coverage proportion becomes small. The activity percentages point out that the cash collection cycle becomes larger consequently company looks some severe issues relating to cash collection (59 days in 2003 whereas 79 in year 2006).

QUERY 3

TO ESTIMATE THE SUSTAINABLE PROGRESS RATE (SGR) THAT WLC CAN PRESERVE WITHOUTFURTHER WEAKENING THE BALANCE SHEET ASSUMING:

NOT ANY CHANGE IN EXACTELY SALES TO TOTAL ASSETS

ZERO CHANGE IN EXACTELY TOTAL DEBTS TO OWNERS’ EQUITY

SIMPLY NO EQUITY PROBLEMS OR REPURCHASES

A RETURN ON BEGINNING EQUITY OF twenty % ( THE 2005 LEVEL), AND

A EXTENSION OF THE INSURANCE PLAN OF SPENDING NO PAYOUTS.

PROBLEM 4

HOW ATTRACTIVE IS TO TAKE THE OPERATE DISCOUNTS?

IF MR. WILSON IS OFFERED MONEY OFF OF 2% FOR A PAYMENT MADE IN 10 DAYS ANDDOES NOT REALLY IN FACT 55 DAYS;

IF MR. PAT OFFERS HIS CUSTOMERS CONDITIONS OF 2 % DISCOUNT INTENDED FOR PAYMENT IN 10 DAYS WHAT WOULD EXPENSE.

A.

2/10/50

(0. 02/(1-0. 02))*(360/(50-10))=0. 18 % Can be 18% curiosity

B.

2/10/30

(0. 02/(1-0. 02))*(360/(30-10))=0, 36% Is 36% interest

I would personally prefer to take a discount because it has a reduced interest rate.

QUERY 5

DO YOU AGREE WITH MR. WILSON’S CALCULATE OF THE PROVIDER’S LOAN REQUIREMENTS? HOW MUCH WILL HE HAVE TO FINANCE THE EXPECTED GROWTH IN PRODUCT SALES TO money 5. 5 MILLION 5 YEARS AGO AND TO HAVE ALL TRADE DISCOUNTS?

We calculated that Mr. Wilson would need a proposal of 982000 not 750000 to financial the anticipated expansion. Too after browsing the liquidity ratios who also tend to reduction in last years, it would be risky to take such a loan.

ISSUE 6

WHILE MR. WILSON’S FINANCIAL ADVISOR, WOULD YOU NEED HIM TO TRAVEL AHEAD WITH, OR TO RECONSIDER, HIS PREDICTED EXPANSION GREAT PLANS FOR ADDITIONAL DEBT FINANCING?

As economical advisor We would urge Mister Wilson for taking the loan, despite the fact of low liquidity and increase in financial debt throughout the previous years. The loan from Suburban National lender is not really sufficient to get meeting the needs of Mr Wilsons company, furthermore, the debt is constantly on the rise due to the buy-out of Mr Holtz; this also offers increased the reduced liquidity with the company. However , the reasons why To obtain the taking the bank loan are:

Up to now Mr Wilson was not able to take advantage of the transact discounts (2% off if perhaps paid within just 10 days), however if you take loan he may be able to do so, in addition , this will also speed up the profitability simply by reducing the cost.

The EBIT is also elevating steadily, however the necessary bank loan Mr Pat could maximize its profits by a third in only 12 months.

The economical value added has increased significantly, especially in year 2005 and in season 2005. Regardless of the significant loan Wilson Timber Company borrows in season 2006, they will still are able to generate financial value of 12, fifty five thousand dollars.

Also very very good indicator that Mr Pat should take the loan is the returning on invested capital which can be actually greater than cost of capital (WACC). Possibly in 12 months 2006 it is estimated that the RETURN will be above WACC, whilst in the next year the ROI is going to continue to develop.

QUESTION 7

AS THE BANKER, MIGHT YOU APPROVE MR. WILSON’S BANK LOAN REQUEST, AND, IF SO , WHAT CIRCUMSTANCES WOULD YOU PLACE ON THE LOAN? HOW ABOUT WORKING CAPITAL ADMINISTRATION WOULD YOU RECOMMEND HIM?

Like a banker I would approve the loan as the corporation itself would not show great risks. A lot of the bad indicators (low liquidity) are created by the limited loan provided by Suburban National Bank and also by customers who not spend immediately. The rather big inventory is also not that badindicator since it also has it benefits- can be ready for unforeseen orders.

Great indicators which usually show that Mr Wilsons Company is usually performing will be the increase in revenue, net income, and return on equity.

If perhaps Mr Wilson would like to take the loan, initial he would have to agree to such conditions:

Keep up with the capital in agreed level;

Reduce the inventory;

Additional investments in fixed assets could be produced only while using prior endorsement of the lender;

The accounts receivables has to be reduced, simply by reducing the payment coming back customers.

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