Wilson Lumber Company Case

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Executive Summary

Wilson Lumber Company is experiencing financing problems as it can no longer keep up with its own sales growth. With the expectation of P 2.5 million in sales for the following year, the company is in need of more funds. The company can choose to establish a new line of credit with the Northrup bank and have access to $325,000 as a revolving credit line, however this would mean severing its relationship with its present bank, the Suburban National Bank.

        Wilson Lumber Company should pursue the loan as it would help them support their funding requirements for 1985. However, that alone is not enough to support their expected sales of 2.5 million. As their sales growth has experienced such tremendous increases, they should consider slowing down and stabilizing their capital structure as too much growth is putting a strain in their finances.

        As the funds needed for the sales of P2.5 million cannot be supported, the company should opt for a much lesser growth rate that would help the company ease their funding needs while still making efficient use of the loan from the Northrup Bank.

        

Case Context

Wilson Lumber Company experienced growth in its business the past three years (1982-1984). It enjoyed increasing profits within this period. But the company is now experiencing financing problems as it can no longer sustain its continued growth.

        

With the expectation of a higher sales level of 2.5 million for 1985, the company is in need of more resources. The company can choose to establish a new line of credit with the Northrup bank and have access to $325,000 as a revolving credit line, however this would mean severing its relationship with its present bank, the Suburban National Bank.

Problem

Should Wilson Lumber Company establish a new credit line with the Northrup bank and sever its relationship with Suburban National Bank? And what can Wilson Lumber Company do to improve its cash management?

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Framework for Analysis

  • Determine the sales growth of the company for the past 3 years
  • Determine the resources needed for the expected sales
  • Establish a cash budget for 1985
  • Establish Pro Forma Income Statements for Sales of 1985

Analysis

Cost of Giving Up Cash Discount

Financing Cost

Northrup Bank

 

Suburban Bank

Decision

Wilson Lumber Company should pursue the loan as it would help them support their funding requirements for 1985. However, ...

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