Case study Wilson Lumber Company Essay

move 1WHY HAS WILSON LUMBER BORROWED INCREASING AMOUNTS patronage ITS CONSISTENT PROFITABILITY?Although the corporation seems to be profitable, it has faced shortage of property. It happened collectible to attach in Accounts Receivable as well as Inventories. On the other hand, Accounts Payable does not increase that rapidly and difficulties regarding cash sight become evident. Furthermore, the cash solicitation cycle becomes larger (59 days in form 2003, while more than 70 in twelvemonth 2006). headspring 2HOW HAS MR. WILSON MET THE FINANCING NEEDS OF THE COMPANY DURING THE PERIOD 2003 THROUGH 2005? HAS THE pecuniary STRENGTH OF WILSON LUMBER IMPROVED OR DETERIORATED? EVALUATE WILSON LUMBER monetary HEALTH.During 2003- 2005 the company borrowed money (long term impart) from bank to finance its operations.In familiar profitability ratios are positive, however, could be higher. That might be a channelize of cost reduction. On the other hand, the company becomes less liqui d and its liquid ratios keep dropping within all years. Both liquidity rations swear that there is lack of cash in the company. The leverage ratios show that company has increased its long term debt and now company becomes more financed by debt than equity. As the debt grows, the care rates become larger and thus the interest coverage ratio becomes smaller. The activity ratios point 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). unbelief 3TO ESTIMATE THE surviveABLE GROWTH RATE (SGR) THAT WLC CAN SUSTAIN WITHOUTFURTHER WEAKENING THE BALANCE SHEET ASSUMINGNO transmit IN THE RATIO OF SALES TO TOTAL ASSETS,NO CHANGE IN THE RATIO OF TOTAL LIABILITIES TO OWNERS EQUITYNO EQUITY ISSUES OR REPURCHASESA RETURN ON BEGINNING EQUITY OF 20 % ( THE 2005 LEVEL), ANDA continuation OF THE POLICY OF PAYING NO DIVIDENDS.QUESTION 4HOW ATTRACTIVE IS TO manoeuvre THE cunning DISCOUN TS ?IF MR. WILSON IS OFFERED A DISCOUNT OF 2% FOR A PAYMENT do IN 10 DAYS ANDDOES 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 final recompense a discount because it has a disordereder interest rate.QUESTION 5DO YOU AGREE WITH MR. WILSONS ESTIMATE OF THE COMPANYS add REQUIREMENTS? HOW MUCH WILL HE NEED TO FINANCE THE EXPECTED working out 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 take such(prenominal) a bring.QUESTION 6AS MR. WILSONS FINANCIAL ADVISER, WOULD YOU URGE HIM TO GO before WITH, OR TO RECONSIDER, HIS ANTICIPATED EXPANSION AND HIS P LANS FOR ADDITIONAL DEBT FINANCING ?As fiscal advisor I would urge Mr Wilson to take the loan, despite the fact of low liquidity and increase in debt throughout the last years. The loan from suburban issue bank is not sufficient for meeting the needs of Mr Wilsons company, furthermore, the debt continues to draw near due to the buy-out of Mr Holtz this in like manner has increased the low liquidity of the company. However, the reasons why I would recommend taking the loan areSo far Mr Wilson was ineffectual to take advantage of the trade discounts (2% off if paid within 10 days), however by taking loan he will 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 inevitable loan Mr Wilson could increase its earnings by one third in only one year.The economic value added also has increased significantly, in particular in year 2004 and in year 2005. Despite the significant loan Wilson Lumber family borrows in year 2006, they will still bring off 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 peachy 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 detonating device 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 hurtful 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 liberal list also is not that badindicator as it also has it benefits- can be ready for unexpected 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 agreed levelReduce the inventoryAdditional investments in fixed assets could be made only with the forward approval of the bankThe accounts receivables must be reduced, by reducing the payment time for customers.