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Wilson Lumber

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Introduction

Memorandum To: Mr. Dodge Subject: Wilson Lumber Loan Date: 25 February, 2009 Wilson Lumber sells building supplies wholesale. Owned by Mr. Wilson, WL is experiencing growth and requires additional funding to meet the demands of growth. Key success factors include cost reduction of operating expenses and substantial quantity discounts which supports the ability to compete on price. Also, positioning is important. Following an economic down-turn, construction of housing has decreased. However, because WL is positioned towards selling for repairs, they are largely immunized against the down-turn. Operationally, WL has reduced costs to succeed by competing on price. They have also positioned themselves in the repairs market, which helps their business remain steady. Their lean operations consist of reduced sales staff, taking orders by phone, and thorough oversight of costs by Mr. Wilson. Their suppliers enjoy buying on credit with discounts and WL's creditors allow them to delay payment. WL therefore has strong relationships with buyers and sellers. WL's financial policy has been to borrow from a competitor bank at 14% up to a limit of $173,000. They are also paying down a $50,000 mortgage over 10 years, the proceeds of which were used to pay a partial liability of $75,000 to a bought-out investor. Profits are retained within the company. Recently, to support increased cash demands such as increased accounts receivable periods, WL has been forced to issue substantial trade debt of $110,000. Despite profitable growth, Wilson is still encumbered by debt of $75,000 to a previous owner. Payments on the mortgage prevent Wilson from taking advantage of 2% discounts because it does not have available cash to make early payments. Appendix 1 shows the sources and uses of WL's funding. In summary, WL requires financing for purchase of inventory and property to support growing sales and to pay short term as well as long term liabilities. WL's alternatives to funding are also explained in the appendix. ...read more.

Middle

Operating Expenses are 25 % of the sales for the years 1985 through 1988 4. Interest expense is assumed to be 14% of the outstanding long and short term debt 5. Provision for taxes is assumed to be 17% based on the average tax rate for the years 1982 through 1984 Appendix 3: Common Size Operating Statements (Scenario 1) Actual Estimated (in thousands of $) 1982 1983 1984 1985 1986 1987 1988 Net Sales 100% 100% 100% 100% 100% 100% 100% Beginning Inventory 10% 11% 12% 12% 12% 12% 12% Purchases 75% 76% 76% 75% 75% 75% 75% Ending Inventory 14% 16% 15% 15% 15% 15% 15% COGS 72% 71% 72% 72% 72% 72% 72% Gross Profit 28% 29% 28% 28% 28% 28% 28% Expenses: Operating 25% 26% 24% 25% 25% 25% 25% Interest 1% 1% 1% 1% 1% 1% 1% Net Income 2% 2% 2% 2% 2% 2% 2% Appendix 4: Balance Sheets as of December 31, 1982 through December 31, 1988 (Scenario 1) Actual Estimated (in thousands of $) 1982 1983 1984 1985 1986 1987 1988 ASSETS Current Assets: Cash 41 34 29 25 25 25 25 Accounts Receivable, net 120 155 222 308 385 482 602 Inventory 167 228 292 375 469 586 732 Total Current Assets 328 417 543 708 879 1,093 1,359 Property, net 90 98 110 121 133 152 175 Total Assets 418 515 653 830 1,012 1,244 1,535 LIABILITIES AND NET WORTH Current Liabilities: Note payable - Suburban Nat'l Bank - 102 163 - - - - Note payable - Northrup Nat'l Bank - - - 190 250 324 415 Note payable - Mr. Stark 75 - Note payable - trade - - 0 0 0 Accounts Payable 87 134 179 283 353 441 552 Accrued Expenses 17 21 27 33 40 50 61 Long term debt - current portion 5 5 5 5 5 5 5 Total Current Liabilities 184 262 374 511 649 820 1,033 Long-term debt 45 40 35 30 25 20 15 Total ...read more.

Conclusion

NA 0.13 0.15 0.18 0.17 0.19 0.21 ?ROA = Net Income / Total Assets (Last Period) NA 0.06 0.06 0.07 0.06 0.06 0.07 Second Scenario 1982 1983 1984 1985 1986 1987 1988 �Types of ratios (Look at the definition not the name) �Operational Ratios ?Days of Inventory = 365?(Inv /COGS) 71.29 82.81 78.14 76.38 76.04 76.04 76.04 ?Collection Period = 365?(AR /Sales) 36.90 40.18 43.01 45.00 45.00 45.00 45.00 ?Payables Period = 365?((AP+Trade Credit) /Purchases) 35.52 45.88 45.75 9.80 9.80 9.80 9.80 �Leverage Ratios ?Liabilities/(Net Worth), 1.21 1.42 1.68 1.87 1.99 2.09 2.15 Interest Coverage = EBIT/Interest 3.89 3.07 2.61 2.86 2.76 3.00 3.18 �Profitability ?Sales Growth = ?Sales/Sales(Last Period) NA 0.19 0.34 0.33 0.25 0.25 0.25 ?Gross Profit Margin = (Sales-COGS)/Sales 0.28 0.29 0.28 0.28 0.28 0.28 0.28 ?Net Profit Margin = (EBIT-Tax)/Sales 0.03 0.03 0.03 0.03 0.03 0.03 0.03 ?ROE = Growth in Net Worth = Net Income / Net Worth (Last Period) NA 0.13 0.15 0.18 0.17 0.19 0.21 ?ROA = Net Income / Total Assets (Last Period) NA 0.06 0.06 0.07 0.06 0.06 0.07 Third Scenario 1982 1983 1984 1985 1986 1987 1988 �Types of ratios (Look at the definition not the name) �Operational Ratios ?Days of Inventory = 365?(Inv /COGS) 71.29 82.81 78.14 76.38 76.04 76.04 76.04 ?Collection Period = 365?(AR /Sales) 36.90 40.18 43.01 45.00 45.00 45.00 45.00 ?Payables Period = 365?((AP+Trade Credit) /Purchases) 35.52 45.88 45.75 10 10 10 10 �Leverage Ratios ?Liabilities/(Net Worth), 1.21 1.42 1.68 1.87 1.83 1.80 1.78 Interest Coverage = EBIT/Interest 3.89 3.07 2.61 2.86 2.51 2.50 2.42 �Profitability ?Sales Growth = ?Sales/Sales(Last Period) NA 0.19 0.34 0.33 0.14 0.14 0.14 ?Gross Profit Margin = (Sales-COGS)/Sales 0.28 0.29 0.28 0.28 0.28 0.28 0.28 ?Net Profit Margin = (EBIT-Tax)/Sales 0.03 0.03 0.03 0.03 0.03 0.03 0.03 ?ROE = Growth in Net Worth = Net Income / Net Worth (Last Period) NA 0.13 0.15 0.18 0.15 0.15 0.14 ?ROA = Net Income / Total Assets (Last Period) NA 0.06 0.06 0.07 0.05 0.05 0.05 ?? ?? ?? ?? 1 ...read more.

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