Butler Lumber
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Question 1: Why does Mr. Butler have to borrow so much money to support this profitable business?
Answer: First let’s take a look at what the current situation is for Mr. Butler;
Rapid sales growth, reaching $3.6 million in 1991 (projected sales = $3.128 million).
Anticipated increase in sales due to rapid growth (25%-35%).
Doesn’t have enough money to manage operations, and is reliant on trade credit and late payment on account payables to help manage their cash flow.
Therefore he needs to borrow money from current bank SNB, however requires an increase borrowing of a total amount of $247,000 for the year 1991.
SNB asks to cover his loan with real property. Mr. Butler however wants a larger unsecured loan and looks to NNB.
Company was founded in 1981 with Mr. Butler and Mr. Stark, but Butler bought out Stark for $105,000 and gained full control and equity of the business.
The $105,000 had to be paid out in 1989 and he took out a loan of $70,000 to cover most of the payment.
Loan was secured with property at a rate of 11%, payable quarterly over the next 10 years.
Personal assets of Mr. Butler are; $72,000 mortgaged on a joint-house, therefore $38,000, and life insurance policy payable to his wife ($70,000).
As we can see from the exhibits (1 & 2) Mr. Butler can meet expected sales, but it is not possible without additional financing. If his goal is to eliminate trade debt and maintain his current bank and loan of $247,000, he would need an additional $157,000, and after taking away his trade credit of $33,000, his final would be exactly $124,000.
However his current bank SNB will not offer