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