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Butler Lumber Co Case Study

Butler Lumber Company Case Study

1644 WordsFeb 10th, 20137 Pages

Butler Lumber Company Case Study

Hoffmeister M-W 4:30 – 5:45

Group #3

Sam Rosenbaum

Joel Valenti

Meg Lee

Stephanie Grob

Butler Lumber Company

Summary of Facts. Butler Lumber Company is a Pacific Northwest based lumber distributor that sells plywood, moldings, and sash and door products. The sole owner of Butler Lumber is Mark Butler, accompanied by one administrative assistant and ten employees who focus on repairs and labor intensive work. Because of Butler Lumber’s competitive pricing scheme, it has seen rapid growth in the past few years. Due to the rapid growth and a shortage of cash in 1990, Butler Lumber Company is seeking to take out an additional loan in order for the business to sustain itself and grow in the coming…show more content…

Mr. Butler could alternatively choose to take the unsecured revolving 90-day note of $465,000 at 10.5% interest from Northrop National Bank. The apparent advantages are: it is a more flexible option, it is an unsecured loan that requires no collateral from Mr. Butler, and it is of a larger amount. The big disadvantages are: the termination of the banking relationship between Butler Lumber and Suburban National Bank, and the increased interest expense on the loan. Another disadvantage of establishing a LOC with Northrop National Bank is the possibility of restrictions on the company stating that the net working capital be maintained at a level agreed upon by both parties and any increase in fixed assets with approval by Northrop. Also there would be limitations on withdrawals of funds from the business by Mr. Butler. Another concern with the loan is that Butler Lumber would need to draw additional loans from Northrop because the company is unable to pay back the loan amount within the 90 day period due to the lack of cash and liquid assets.
-Why does Butler Lumber have a cash shortage problem to begin with ,and are they currently using their existing funds efficiently? The “Sources and Uses of Funds brings forth a snapshot of the company’s cash flows and illustrates the reason behind Butler Lumber’s cash deficit. For the past two years, Butler Lumber

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Case Study: Butler Lumber Company Butler Lumber Company (BLC) has experienced prodigious growth in the short life of its company. However, a shortage of funds has forced BLC to use debt extensively and now this lifeline is on the verge of exhaustion. BLC must formulate a plan that emphasizes debt reduction and increases their sources of cash to continue their growth. Alternative 1: Extend Loan to BLC George Dodge should encourage BLC to acquire the $465,000 from Northrop National Bank (NNB). BLC will continue to be a profitable company without the additional funding from NNB. This is evidence that BLC is a viable firm and Dodge can collect on the compound interest payments that would have otherwise been paid to Suburban National Bank (SNB). The reallocation of BLC’s debt can reduce compound interest paid and creditworthiness for BLC and simultaneously increase interest profits for NNB. BLC should transfer the debt of the loan used to pay Henry Stark to their new credit line. With an 11% interest rate, 7 years remaining, BLC will pay $103,808.01. If BLC transfers their balance they will save $3229.32 over the life of the loan. In addition, SNB will capture $10560.76 from the reallocation of this liability. BLC’s loan with SNB carries a 98.8% of total available credit balance. This explains in part their subprime rate on their quoted rate with NNB. However, with the adoption of the new credit line, BLC will now be able to take advantage of the discount of 2% available for payments made within 10 days

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