Case study Wilson Lumber Company Essay

chief 1why HAS WILSON LUMBER BORROWED INCREASING AMOUNTS DESPITE ITS accordant PROFITABILITY?Although the political party seems to be profit adequate to(p), it has confront shortage of cash. It happened cod to growing in Accounts Receivable as well as Inventories. On the other hand, Accounts Payable does non increase that rapidly and difficulties regarding cash hookup become evident. Furthermore, the cash parade rhythm method of birth control becomes larger (59 days in course 2003, while more than 70 in year 2006). promontory 2HOW HAS MR. WILSON MET THE support NEEDS OF THE COMPANY DURING THE PERIOD 2003 done 2005? HAS THE pecuniary STRENGTH OF WILSON LUMBER alter OR DETERIORATED? EVALUATE WILSON LUMBER monetary HEALTH.During 2003- 2005 the high society borrowed money (long term contribute) from stick to finance its operations.In general positivity ratios are positive, thus far, could be higher. That might be a signal of cost reduction. On the other hand, the com pany becomes less mobile and its liquidity ratios keep dropping at heart all years. Both liquidity rations avow that there is lack of cash in the company. The leverage ratios target that company has increase its long term debt and now company becomes more financed by debt than equity. As the debt grows, the concern rates become larger and gum olibanum the interest groupingness coverage ratio becomes smaller. The natural action ratios point out that the cash aggregation cycle becomes larger therefore company faces some serious issues regarding cash collection (59 days in 2003 whereas 78 in year 2006).QUESTION 3TO project THE SUSTAINABLE GROWTH RATE (SGR) THAT WLC dismiss SUSTAIN WITHOUTFURTHER WEAKENING THE proportionateness SHEET ASSUMINGNO qualify IN THE dimension OF SALES TO arrive ASSETS,NO CHANGE IN THE RATIO OF TOTAL LIABILITIES TO OWNERS righteousnessNO EQUITY ISSUES OR REPURCHASESA RETURN ON BEGINNING EQUITY OF 20 % ( THE 2005 LEVEL), ANDA CONTINUATION OF TH E POLICY OF PAYING NO DIVIDENDS.QUESTION 4HOW ATTRACTIVE IS TO sequestrate THE TRADE DISCOUNTS ?IF MR. WILSON IS OFFERED A DISCOUNT OF 2% FOR A PAYMENT MADE IN 10 DAYS ANDDOES NOT IN FACT 50 DAYSIF MR. WILSON OFFERS HIS CUSTOMERS legal injury 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 take a discount because it has a lower interest rate.QUESTION 5DO YOU see WITH MR. WILSONS ESTIMATE OF THE COMPANYS give REQUIREMENTS? HOW MUCH WILL HE NEED TO FINANCE THE EXPECTED elaborateness IN SALES TO $ 5.5 MILLION IN 2006 AND TO TAKE ALL TRADE DISCOUNTS?We compute that Mr. Wilson would need an estimate of 982000 not 750000 to finance the expected expansion. As well later on viewing the liquidity ratios who tend to precipitate in last years, it would be uncivilized to take such a contribute.QUESTION 6AS MR. WILSONS FINANCIAL ADVISER, WOUL D YOU URGE HIM TO GO AHEAD WITH, OR TO RECONSIDER, HIS ANTICIPATED EXPANSION AND HIS PLANS FOR ADDITIONAL DEBT funding ?As financial advisor I would urge Mr Wilson to take the loan, despite the event of low liquidity and increase in debt throughout the last years. The loan from suburban interior(a) bank is not ample for meeting the needs of Mr Wilsons company, furthermore, the debt continues to rise due to the buy-out of Mr Holtz this likewise has increased the low liquidity of the company. However, the reasons why I would recommend fetching the loan areSo uttermost Mr Wilson was unable to take advantage of the concern 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 necessary loan Mr Wilson could increase its compensation by one third in tho one year.The economic apprize added also has incre ased significantly, especially in year 2004 and in year 2005. disdain the significant loan Wilson Lumber companion borrows in year 2006, they will heretofore manage to generate economic esteem of 12, 55 thousand dollars.Also real good index finger that Mr Wilson should take the loan is the return on invested capital which is real higher than cost of capital (WACC). blush in year 2006 it is estimated that the ROI will be higher than WACC, while in the abutting 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 CAPITAL focus WOULD YOU RECOMMEND HIM?As a banker I would approve the loan as the company itself does not show great risks. near of the bad indicators (low liquidity) are created by the moderate loan provided by Suburban National Bank and also by the customers who does not pay immediately. The rather big take stock also is not that badindi cator 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 conditions hold up the capital at agreed trainReduce the inventoryAdditional investments in fixed assets could be made only with the prior approval of the bankThe accounts receivables must be reduced, by reducing the requital time for customers.