Reference no: EM131154735

CLARKSON LUMBER - Assignment 1

"Keith Clarkson, sole owner and president of the Clarkson Lumber Company, has received a number of informal inquiries from large, nationally-recognized building materials distributors about purchasing his company. Although Clarkson relishes operating his own business the would be interested if an attractive offer were received. Unfortunately, Mr. Clarkson is unsure how much his company is worth so he turns to you for guidance.

Your end goal is to value Clarkson Lumber operations at the beginning of 1996 (i.e. at the end of 1995) assuming the firm will obtain a credit line at Northwestern National Bank sufficiently large to take advantage of discounts on purchases for paying within 10 days of invoice, thus increasing operating profit margins.

With higher mark-ups and continued operating expense controls, Clarkson projects a steady operating profit margin of 6% by 2000. Margins and investment requirements will also stabilize in relation to sales growth. Relevant projection inputs are in the table below and the discount rate is 11.5%.

Note that the forecast ratios already include the benefit the of the 2% trade discounts.

For simplicity, use a tax rate of 35% throughout the projections.

Make whatever other reasonable assumptions are necessary to complete your analysis and explain the rationale for each."

Projection Assumptions	avg 93-95	1996	1997	1998	1999	2000	2001	2002	2003
Sales		5,500
Sales growth rate	24.5%	21.7%	20%	15%	10%	5%	5%	5%	5%
CGS/Sales	75.6%	75.0%	74.0%	74.0%	74.0%	74.0%	74.0%	74.0%	74.0%
Op Exp/Sales	20.9%	20.4%	20.0%	20.0%	20.0%	20.0%	20.0%	20.0%	20.0%
OPM	3.5%	4.6%	6.0%	6.0%	6.0%	6.0%	6.0%	6.0%	6.0%
Tax rate	20.5%	35%	35%	35%	35%	35%	35%	35%	35%
AR DOH (= AR/daily sales)	43.4	43.4	43.4	43.4	43.4	43.4	43.4	43.4	43.4
Inv DOH (=inventory/daily COGS)	59.4	59.4	59.4	59.4	59.4	59.4	59.4	59.4	59.4
NFATO (@Sales) (= sales/NFA)	12.5	12.5	12.5	12.5	12.5	12.5	12.5	12.5	12.5
AP DOH (AP/daily purchases)	39.7	10	10	10	10	10	10	10	10
Acc Exp/Sales	1.46%	1.46%	1.46%	1.46%	1.46%	1.46%	1.46%	1.46%	1.46%

CLARKSON LUMBER - Assignment 2 (optional)

Following what was done in assignment 1 (see the solution above in this file), and going back to Clarkson Lumber balance sheet:

1 - Identify and value the non-operating assets of the firm as of 1995

2 - List and value the debt items of the firm as of 1995

3 - What is Mr. Clarkson' equity interest worth?

Exhibit 1: Operating Expenses for Years Ending December 31, 1993-1995, and for First Quarter 1996  (thousands of dollars)

		1993	1994	1995	1st Quarter 1996
Net sales		$2,921	$3,477	$4,519	$1,062
Cost of Goods Sold:
	Beginning inventory	330	337	432	587
	Purchases	2,209	2,729	3,579	819
		$2,539	$3,066	$4,011	$1,406
	Ending inventory	337	432	587	607
Total Cost of Goods Sold		$2,202	$2,634	$3,424	$799
Gross profit		719	843	1,095	263
Operating expensesb		622	717	940	244
Earnings before interest and taxes		$97	$126	$155	$19
Interest expense		23	42	56	13
Net income before income taxes		$74	$84	$99	$6
Provision for income taxesc		14	16	22	1
Net income		$60	$68	$77	$5

In the first quarter of 1995, sales were $903,000 and net income was $7,000.

Operating expenses include a cash salary for Mr. Clarkson of $75,000 in 1993; $80,000 in 1994;  $85,000 in 1995; and $22,500 in the first quarter of 1996.

Clarkson Lumber was required to estimate its income tax liability for the current tax year and pay four quarterly estimated tax installments during that year. The first $50,000 of pretax profits were taxed at a 15% rate; the next $25,000 were taxed at a 25% rate; the next $25,000 were taxed at a 34% rate; and profits in excess of $100,000 but less than $335,000 were taxed at a 39% rate.

Exhibit 2 Balance Sheets at December 31, 1993-1995, and March 31, 1996 (thousands of dollars)

		1993	1994	1995	1st Quarter 1996
Cash		$43	$52	$56	$53
Accounts receivable, net		306	411	606	583
Inventory		337	432	587	607
	Current assets	$686	$895	$1,249	$1,243
Property, net		233	262	388	384
	Total Assets	$919	$1,157	$1,637	$1,627
Notes payable, banka		$    --	60	390	399
Note payable to Holtz, current portionb		--	100	100	100
Notes payable, trade		--	--	127	123
Accounts payable		213	340	376	364
Accrued expenses		42	45	75	67
Term loan, current portionc		20	20	20	20
	Current liabilities	$275	$565	$1,088	$1,073
Term loanc		140	120	100	100
Note payable, Mr. Holtzb		--	100	0	0
	Total Liabilities	$415	$785	$1,188	$1,173
Net worth		504	372	449	454
	Total Liabilities and Net Worth	$919	$1,157	$1,637	$1,627

Interest is computed on the average outstanding loan balance at the rate of prime plus 2 1/2%.

Interest is fixed at 11% times the outstanding balance.

Interest is fixed at 10.0% times the outstanding balance; the term loan is secured by the fixed assets and is repayable in semiannual installments of $10,000.

Attachment:- clarkson case - optional assignment.xlsx