Wilson Lumber Company

Your job is to evaluate Mr. Wilson’s loan application for the Northup Bank, and
ultimately, to decide whether or not to grant a loan. To start with, Mr. Dodge needs
a memo from you describing Wilson’s business, the likely reason(s) for his funding
need, and the possible ways in which it can be financed.

First, focus on Wilson’s business, leaving finance issues aside.

1) Describe briefly the lumber business and what you think are the key factors to
be successful in it.

2) How well is the Wilson Lumber Company doing from an operational (as
opposed to financial) standpoint?

Now turn to some financial issues.

3) Describe briefly Wilson’s financial policy over the past few years.

4) Why does Mr. Wilson have to borrow money to support his business?

a) A useful beginning to the analysis is the preparation of a Sources and Uses

(or Fund Flow) Statement for the period 1982 though 1985’s first quarter.
The “Sources and Uses Statement” helps you get a quick (but rough) picture
of where cash is coming from (Sources) and where it is going (Uses). To
construct the statement:

- Compare Wilson Lumber’s Balance Sheet in 1982 and 1985 (Q1)

- Classify each Asset that has increased (decreased) as a Use (Source)
- Classify each Liability that has increased (decreased) as a Source (Use)

What are the Wilson Lumber Company’s main Sources and Uses of funds?

b) You should also calculate and study those financial ratios that, according to
you, can help explain Wilson’s need for funds.

Now that you have a better understanding of Wilson’s business, forecast his future
funding needs:

5) Do you agree with Mr. Wilson’s conclusion that a $325,000 line of credit would
more than meet his foreseeable funding needs? How much will he need to
borrow in order to finance his expected sales over the next few years?
To answer this question, assume that Sales reach $2.5M in 1985 and construct pro
forma income statement and balance sheet projections for the years 1985 to 1988,
under the following three scenarios:

a) Sales grow at 25% per year over 1985 and the payment period of his
Accounts payables remains around 55 days;
b) Sales grow at 25% per year over 1985 and Wilson cuts the payment
period of his Accounts payables to 10 days (to get the 2% discount);
c) Sales grow at 14% per year over 1985 again under the assumption that
the payment period of Accounts payables is down to 10 days.

You will need to estimate the size of the bank loan under each scenario. To do this,
you may want to proceed as follows (Higgins, chapters 3 & 4, can be useful.)
Forecast assets (making appropriate assumptions);

- Forecast non-bank liabilities, including Net Worth (again, making

appropriate assumptions);
- The difference gives you the “Bank plug”;
- With this level of Bank debt, is Net Income what was assumed? If yes,
stop. Otherwise, use this Net Income to calculate a revised value of Net
Worth, and repeat until you converge.

Note: Remember that we are dealing with rough estimates (no need to converge at
the 10th decimal).

6) As Mr. Wilson’s financial advisor, would you urge him to go ahead with his
plans for further expansion and more debt financing — or reconsider both?
Explain in brief.

7) As his banker, would you be willing to lend to Mr. Wilson? If so, what conditions
would you attach to the loan? If not, explain why, and what Wilson might do to
make you change your mind.