Corporate Finance I Professor Sherman

Abe
Term 1 Fall 2014 8 October
2014
Case Stu! " Clar#son $umber Compan!
This case study is about Maxs Rules #1, Dont run out of cash and #3, Make Good inancin!
Decisions" Re#e#ber that accountin! inco#e and actual cash re$uire#ents can re%eal contrastin!
financial conditions of a business"
The case &ro%ides a re%ie' of accountin! and financial funda#entals throu!h the analysis of the
balance sheet, the inco#e state#ent, and the cash flo' state#ent" (n analysis of financial ratios 'ill
hel& identify the issues faced by Mr" )larkson"
Then, ask yourself, *o' do these financial issues influence the strate!ic business decisions Mr"
)larkson #ust #ake+

%iscussion &uestions 'This is not a (ritten assi)nment*+

1" ,ac#)roun of Clar#son $umber Compan! '-C$C-+"
,hat is the business+ ,hat is the o'nershi& history+ ,hat are key &illars of the co#&anys
business strate!y+
-" Purchase of .enr! .olt/0s o(nership in C$C"
a" ,here is the cash co#in! fro# to &ay Mr" *olt.+
b" ,hat is the accountin! treat#ent of the &urchase+
c" ,hen are the &ay#ents due to Mr" *olt., and 'hat is the interest char!ed+
3" Trae Creit"
a" *o' financially attracti%e or unattracti%e is the trade discount of -/ for &ay#ents #ade 'ithin
10 days of the in%oice date+ 1)o#&are the trade discount to the nor#al re$uire#ent to &ay
100/ in 30 days of the in%oice date"2
b" *o' does this cost co#&are to the cost of financin! fro# the bank+
c" 3hould Mr" )larkson continue to use trade credit in o&eratin! his business+
4" Financial Issues 'See &uestion 12 belo(+"
a" ,hy is )5) short of cash des&ite its risin! accountin! &rofitability+
b" ,here is cash co#in! fro#+ ,here is cash bein! used+
c" *o' has Mr" )larkson #et the financin! needs of )5) bet'een 166371668+
8" Financial Anal!sis for &uestion 14 abo3e9
a" ,hat has been the co#&ounded annual !ro'th rate 1)(GR2 of sales and net inco#e bet'een
166371668+
b" Dra' u& a si#&le 3ources and :ses )ash lo' 3tate#ent for 1664 and 1668" ,here is cash
co#in! fro#+ ,here is cash bein! used+
c" 3tudy the year7to7year trends in
1i2 li4uiit! 1'orkin! ca&ital, current ratio, and $uick ratio2"
1ii2 le3era)e 1assets;e$uity ratio2"
1iii2 efficienc! 1sales to assets, accounts recei%ables as a &ercenta!e of sales, a%era!e
collection days of accounts recei%ables, and in%entory turno%er2"
1i%2 profitabilit! 1!ross #ar!ins, o&eratin! &rofit #ar!ins, o&eratin! ex&enses as a &ercenta!e
of sales, return on assets, and return on e$uity2"
,hat do these trends indicate about the financial health of )5)+
1<ote9 3ince data is li#ited, use yearend nu#bers rather than a%era!es in calculatin!
financial ratios" (lso, there are no mar#et 3alue ratios to analy.e since )5) is a &ri%ate
co#&any"2
d" =xhibit 3 &ro%ides data for lo'7&rofit and hi!h7&rofit co#&etitors of )5)" (naly.e )5) relati%e
to its co#&etitors in ter#s of these #easure#ents usin! 1668 yearend data for )5)" (ny
sur&rises+
>" Pro5Forma Financial Pro6ection for 17789
a" (ssu#e that )5)s sales 'ill !ro' in 166> in line 'ith <orthru& <ational ?anks esti#ate of @8"8
#illion, and further assu#e that )5) 'ill re&lace the trade financin! 'ith bank financin!" ,ill the
&ro&osed ne' line of credit u& to a #axi#u# @A80,000 be sufficient to #eet )5)s ex&ected
cash needs by yearend 166>+
b" )reate a &ro for#a yearend 166> balance sheet to deter#ine if the loan li#it of @A80,000 'ill be
sufficient to co%er cash needs by yearend" 1<ote9 Bou 'ill need to #ake se%eral
esti#ates;assu#&tions in &roCectin! )5)s &erfor#ance for the re#ainin! three $uarters of
166>"2
A" Financial an Strate)ic A3ice"
(ssu#e that you are Mr" )larksonDs ad%isor" ,hat financial or strate!ic alternati%es 'ould you
ad%ise for Mr" )larkson+
E" 9eneral Topic"
Does ra&id sales !ro'th al'ays cause cash shorta!es+ Fn 'hat kinds of businesses #i!ht Cust the
o&&osite be true+

:;%