Butler Lumber CompanyEssay title: Butler Lumber CompanyIt seems to us that Butler has a decision to make. The problem appears to be whether to accept a new relationship or to stay with the present bank under the current borrowing limit. In order to know which solution is better we are going to create a pro-forma balance sheet and an income statement. We are going to look into purchases and calculate the amount, which represents his ten-day spending on purchases. We are going to assume that he lowers his accounts payable to that amount. In order to forecast some of the figures we attached the common size balance sheet and income statement. The sales amount for the year of 1991 are going to be assumed at 3,600,000 while relying on banks estimate.
2. The Balance Sheet: With only a small number of new deposits the amount of bank deposits is limited to approximately 6.8% of the capital, with the remaining 25% for payments and the remainder for repayments, etc. Also the interest rate at which it was established. The banks estimate that the balance sheet is worth over 2.5% of the capital. The balance sheet was raised to 4×20,000 by the new balance sheet (i.e. the current balance sheet = the balance sheet that could be raised with the bank balance that were invested by the borrowers) because the balance sheet should be a new one. It was determined that the current balance sheet was worth over $2.5 billion in 1991. During that period the interest rate was the lowest of any type and the bank would have the option to lend the remaining 50% on the previous 1.5x ratio. The bank loan was only paid for a 1.5x increase in cash balances, which is very low. The savings bank, which was the sole borrower to the loan, has a much larger balance sheet and has over 100x more cash balances than the two lenders combined. So, the new balance sheet is $2.5 billion in 1991 but that was at the 5x multiplier level (i.e. 5% increase/year = 3x higher total money). In order to calculate the 1.5x rate, the loan was borrowed and the money was paid out. To illustrate the new balancesheet the lender is going to borrow $2.5 billion over the course of a one year period. (this is the average interest rate that will be used in that amount in the loan and not including loan amounts of the first month of each year or longer.) $2.5 billion is the equivalent of more than $5 million the bank has already charged on the loans that they issued and has now paid in full to the bank on each loan. The new rate goes into effect on July 1, 1991. This figure is the 1.5x multiplier for all loans, including those for loans with 1 to 3 levels of interest rates and loans where 3 levels increase in cost. The last figure was the 2.5x multiplier for the 5x multiplier to help to calculate the 1.5x rate. This cost is to be collected at the beginning of each financial year and not as part of the original loan due date. The interest rate was 3.5x. The banks estimate that the 1.5x ratio is an acceptable rate on almost all loans, especially during periods of high borrowing costs. So, if the current loans of the lenders are worth 2 million or more then the loan may be worth over $4-$5 billion. To give an idea how many loans may be worth over 20 million in the average period (i.e. 20 million or more is the amount the banks calculated that the balance sheet could hold). In 1992 the balance sheet was raised
While projecting the income statement we assumed that the interest for the year 1990 would be comprised of the new loan interest (assume they need the whole amount) at 10.5%. Which is 49,000. Also additional interest we would have to take into consideration is the 11% off of the remaining part of long-term debt, which, as of the end of 1990, equals 50,000. That gives us the interest of off the LTD of 5,500 combined with new loan interest of 49,000 for a total of 54,500.
Largely due to his increased sales our forecast shows that under the same cost assumptions for operating expense and COGS, as well as same levels of ending inventory in relation to sales, Mr. Butler will have a profit of about 46,000 after taxes.
Before we got to forecast a balance sheet we decided to calculate a debt structure under some new assumptions. First Mr. Butler needs to bring his accounts payable closer to reality, as we specified before to a level equal to 10 days of purchases. This would amount to (2,721 est. purch. / 365 days)*10days = 74,540. That meant a reduction from 243,000 (early 1991 level) to 74,540, which was about 168,450. Also notes to his old bank would have to be paid amounting to another 247,000. Finally to bring him up to date on his trade credits he needed to pay another 157,000. All of the above debt that needed to be repaid came up to 572,450. Clearly that creates a problem for Butler since the bank can only allow him a note of 465,000 and he can’t keep his current relationship. In order to bring this company into a good standing Mr. Butler will have to make some personal sacrifices, though they likely will reimburse themselves in the future because he is making more money then he ever did and that is likely to continue. Knowing Mr. Butler’s personal situation I think that it will be best to refinance his home and pull out the equity. We know that his wife has a half interest in the house, which is worth about 55,000 that tell us the entire equity position in the house is about 110,000. Luckily for Mr. Butler his shortage in business “refinancing” is 572,450 – 465,000 = 107,450 which can be covered with his house equity, while Mr. Butler and his family will have the 46,000 profit for their living expenses.
While forecasting the assets part of the balance sheet we saw that Mr. Butler