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Butler Lumber Company Case Report

Autor:   •  November 4, 2018  •  932 Words (4 Pages)  •  892 Views

Page 1 of 4

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1988

1989

1990

1990Q1

Current ratio=CA/CL

1.80

1.59

1.45

1.35

Quick ratio=CA-Inv/CL

0.88

0.72

0.67

0.54

Cash ratio(=cash+sec)/CL

0.22

0.13

0.08

0.04

Total debt ratio(total lia/total ass)

0.55

0.59

0.63

0.67

Debt-equity ratio(tot lia/tot equ)

1.20

1.42

1.68

2.06

Times interest earned(EBIT/Interest)

3.85

3.05

2.61

2.1

As the banker, I won’t approve Mr. Butler’s loan request.

Obviously, the company’s debt-paying ability is limited and decreasing. The leverage and liquidity ratios keep going up and the all the liquidity ratios are less than the general level, which means the company possibly has difficulty to repay the loan. Admittedly, the company’s net sales keep increasing thus ROA and ROE are going up, but we still disagree with the loan. Because in last 2 years, Butler took few purchase discounts due to the shortage of cash and we can not ensure that the cash would be enough for purchase discount in 1991. If it is not, the company can not benefit from purchase discount and the COGS would keep a high level. What’s more, the sales volume largely based on controlling operating expenses and purchasing lots of materials at substantial discounts. So the company’s profitability is exposed to great external risk of losing the purchase discount opportunity. As a result, the net income may not increase that much.

Q4:

To confirm whether Butler Lumber Company has created value for shareholders, there are three ways. First, we can calculate the ROE (Rate of Return on Common Stockholders’ Equity) of year 1989 and 1990 because ROE reflects the income level of shareholders' equity. And we can see from the Exhibit 9 that the ROE of year 1989 is 0.12 and year 1990 0.13, Both of the two ROE is larger than the interest rate (10.5%), so ROE is definitely larger than the risk free rate. Thus we can conclude that Butler Lumber Company created value for shareholders. The other two methods are to use NPV and EVA to evaluate. But we don’t have enough known numbers in the case, so we can’t use these two ratios.

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