Case study Wilson Lumber Company Essay

brain 1 wherefore HAS WILSON LUMBER BORROWED INCREASING AMOUNTS DESPITE ITS CONSISTENT PROFITABILITY?Although the phoner seems to be profitable, it has faced shortage of cash. It happened due to subjoin in Accounts Receivable as well as Inventories. On the other hand, Accounts Payable does non increase that rapidly and difficulties regarding cash collection let evident. Furthermore, the cash collection calendar method of birth control becomes larger (59 days in stratum 2003, part more than 70 in twelvemonth 2006).QUESTION 2HOW HAS MR. WILSON MET THE FINANCING acceptS OF THE keep come with DURING THE PERIOD 2003 THROUGH 2005? HAS THE pecuniary STRENGTH OF WILSON LUMBER IMPROVED OR DETERIORATED? EVALUATE WILSON LUMBER FINANCIAL HEALTH.During 2003- 2005 the company borrowed money (long term bestow) from swear to finance its operations.In general profitability ratios argon positive, however, could be higher. That capability be a signal of cost reduction. On the other hand, the company becomes less liquid and its liquid ratios keep dropping within every last(predicate) years. Both liquidity rations inform that there is lack of cash in the company. The leverage ratios delegate that company has increased its long term debt and right impinge on company becomes more financed by debt than equity. As the debt grows, the involution rates become larger and thus the interest coverage ratio becomes smaller. The activity ratios position out that the cash collection cycle becomes larger therefore company faces some serious issues regarding cash collection (59 days in 2003 whereas 78 in year 2006).QUESTION 3TO hazard THE SUSTAINABLE return RATE (SGR) THAT WLC CAN SUSTAIN WITHOUT FURTHER WEAKENING THE BALANCE pall ASSUMINGNO CHANGE IN THE RATIO OF SALES TO agree ASSETS,NO CHANGE IN THE RATIO OF TOTAL LIABILITIES TO OWNERS fair-mindednessNO EQUITY ISSUES OR REPURCHASESA RETURN ON BEGINNING EQUITY OF 20 % ( THE 2005 LEVEL), ANDA CONTINUATION OF THE PO LICY OF PAYING NO DIVIDENDS.QUESTION 4HOW ATTRACTIVE IS TO TAKE THE TRADE cutS ?IF MR. WILSON IS OFFERED A DISCOUNT OF 2% FOR A PAYMENT MADE IN 10 DAYS AND DOES not IN FACT 50 DAYSIF MR. WILSON OFFERS HIS CUSTOMERS TERMS OF 2 % DISCOUNT FOR PAYMENT IN 10 DAYS WHAT WOULD COST.A.2/10/50(0.02/(1-0.02))*(360/(50-10))=0.18 % Is 18% interestB.2/10/30(0.02/(1-0.02))*(360/(30-10))=0,36% Is 36% interestI would prefer to buck a discount because it has a lour interest rate.QUESTION 5DO YOU AGREE WITH MR. WILSONS ESTIMATE OF THE COMPANYS lend REQUIREMENTS? HOW MUCH WILL HE NEED TO FINANCE THE EXPECTED EXPANSION IN SALES TO $ 5.5 MILLION IN 2006 AND TO TAKE ALL TRADE DISCOUNTS?We calculated that Mr. Wilson would need an estimate of 982000 not 750000 to finance the expected expansion. As well after viewing the liquidity ratios who tend to decrease in last years, it would be risky to dash such a impart.QUESTION 6AS MR. WILSONS FINANCIAL ADVISER, WOULD YOU URGE HIM TO GO AHEAD WITH, OR TO RECONSIDER, HIS ANTICIPATED EXPANSION AND HIS PLANS FOR additive DEBT FINANCING ?As financial advisor I would urge Mr Wilson to take the loan, despite the fact of subaltern liquidity and increase in debt throughout the last years. The loan from Suburban National bank is not comfortable for meeting the needs of Mr Wilsons company, furthermore, the debt continues to rise due to the buy-out of Mr Holtz this likewise has increased the low liquidity of the company. However, the reasons why I would recommend taking the loan areSo far Mr Wilson was unable to take advantage of the trade discounts (2% off if paid within 10 days), however by taking loan he get out be able to do so, in addition, this will also help to increase the profitability by reducing the costs.The EBIT is also increasing steadily, however with the necessary loan Mr Wilson could increase its earnings by one third in only one year.The economic pry added also has increased significantly, especially in year 2004 and in year 2005. Despite the significant loan Wilson Lumber Company borrows in year 2006, they will still manage to generate economic value of 12, 55 thousand dollars.Also very good indicator that Mr Wilson should take the loan is the return on invested capital of the United States which is actually higher than cost of capital (WACC). Even in year 2006 it is estimated that the ROI will be higher than WACC, while in the next year the ROI will continue to grow.QUESTION 7AS THE BANKER, WOULD YOU APPROVE MR. WILSONS LOAN REQUEST, AND, IF SO, WHAT CONDITIONS WOULD YOU PUT ON THE LOAN ? WHAT ABOUT WORKING CAPITAL MANAGEMENT WOULD YOU RECOMMEND HIM?As a banker I would approve the loan as the company itself does not show great risks. Most of the hard indicators (low liquidity) are created by the limited loan provided by Suburban National Bank and also by the customers who does not pay immediately. The rather big inventory also is not that bad indicator as it also has it benefits- can be ready for unthought-of orders.Good indicators which show that Mr Wilsons Company is performing are the increase in sales, net income, and return on equity.If Mr Wilson would like to take the loan, first he would have to agree to such conditionsMaintain the capital at hold levelReduce the inventoryAdditional investments in fixed assets could be made only with the prior approval of the bankThe accounts receivables must be reduced, by reducing the payment time for customers.