Wilson Lumber Company                              Page  of

PROBLEM

Will it be more beneficial for Wilson Lumber Company to avail of the $325,000 credit line than to adjust its expected sales growth based on its current funding capacity?

ASSUMPTIONS

For income statement projections:

  1. Project sales under a 5%, 15%, 25%, and 33% growth rate.
  2. Project the following as percentage of sales:
  1. Cost of goods sold
  2. Other operating expenses
  1. Project salaries expense using an increase of 5,000 per year.
  2. Project interest expense as percentage of interest-bearing liabilities.
  3. Project tax expense as percentage of income before interest and taxes.

For balance sheet projections:

  1. Project the following as percentage of sales:
  1. Cash
  2. Property, net
  3. Accrued expenses
  1. Project accounts receivable using the 1984 average collection period.
  2. Project inventory using the 1984 average age of inventory.
  3. Project accounts payable using the 1984 average payment period.
  4. Hold constant all other liabilities based on 1985 1st quarter balances to properly determine external financing required.
  5. Project net worth by adding income to previous year’s net worth.
  6. The external financing required will serve as the balancing figure.

LIST OF EXHIBITS

EXHIBIT 1: 33% annual growth rate – (1985) 2.5 Million sales

Findings:

Exhibit 1 shows the projected income statement and balance sheet based on the expected growth rate of 33% leading to a 2.5 M sales in 1985. The company’s current funding capacity will not be able to support this level of sale unless it resorts to external financing. The company has the option of establishing a credit line of 325,000 from Northrup. Although this may support the sales expansion in 1985, it will not be able to sustain it for the succeeding years.

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EXHIBIT 2: 25% annual growth rate – (1985) 2.355 Million sales

Findings:

Exhibit 2 shows the projected income statement and balance sheet based on the expected growth rate of 25%. The company’s current funding capacity will not be able to support this level of sale unless it resorts to external financing. The company has the option of establishing a credit line of 325,000 from Northrup. Although this may support the sales expansion in 1985, it will not be able to sustain it for the succeeding years.


EXHIBIT 3: 15% annual growth rate – (1985) 2.167 ...

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