Cartwright Lumber Co. Harvard Case Solution & Analysis

Do you agree with his estimate of the company's loan requirements? How much will he need to borrow to finance his expected expansion in sales? Assume a 2004 sales volume to be that mentioned in the case, that he does not take purchase discounts for the period January 1 to December 31, 2004 and beyond, and that the relationships between sales and those income and balance sheet line items that vary with sales will be the same in 2004 as in 2003. Ignore the data in the case for the first quarter of 2004.

Currently the loan requirements are for $247,000, however, the forecasted cash flow requirements based on the forecast of next three year income statement and balance sheet reveals that Cartwright Lumber Company will need additional loan of $264,000/- in order to finance the expected expansion in sales revenues.

Q3.) If you were a banker, how would you evaluate the loan? Discuss including the five C’s of credit.

A bank usually evaluates the credit worthiness of individuals and companies by using the five Cs model, which helps them to ensure the repayments of interest and principle. Five Cs are discussed below;

Character: The character of Mr. Cartwright, sole owner of Cartwright Lumber Company is good enough as per the inquiries of Northrop National Bank Cartwright is a very dedicated and hard working business man, therefore, Cartwright Lumber Company meets the first “C” of credit worthiness.

Capacity: Cartwright Lumber Company has generated interest cover ratio of 3.85 times during 2001 but this ratio is continuously decreasing and by the end of 2003; this has decreased to 2.61 times of profits before interest expense, although interest cover ratio has decreased by 32% over three year period (2001 to 2003), but still Cartwright Lumber Company is generating more than double of its interest commitments.

Capital: Cartwright Lumber Company equity capital is amounted $348,000 during the year 2001, which means that he only owns $348,000 worth of net capital.

Collateral: The only house that is owned by Cartwright and his wife amounts to $150,000/- out of which Cartwright’s part has already been given as mortgage, meanwhile, Cartwright can use personal guarantee of his wife for taking a bank loan.

Conditions: The market for Cartwright Lumber Company’s products is growing and sales forecasts are also favorable.

Q4.) Does it make sense for Mr. Cartwright to take the purchase discounts if he can? How will this affect his cash requirements for 2004? What would the income statement and balance sheet look like if he took the discounts for the entire 2004 year?

2% discount on purchases will be in favor of Mr. Cartwright, and this will decrease the debt requirements by $12,000. Therefore, the balance sheet will show that its working capital requirements has been decreased due to discount on purchases and it will also improve the gross profit margins through a decrease in  cost of goods sold.

Q5.) What would you recommend to Mr. Cartwright and to the banker?

Based on the above analysis Mr. Cartwright would be recommended to take the loan from Northrop National Bank, meanwhile, he is recommended to built closet and good business relationship with Northrop National Bank in order to secure more favorable terms of loan.

However, the Northrop National Bank is recommended to grant the loan to Mr. Cartwright because he fulfills the five Cs criteria for credit worthiness evaluation. Meanwhile, the bank is recommended to keep an eye on the financial figures and covenants in order to make sure that no inappropriate or unfavorable decisions are being made by Cartwright Lumber Company, which may potentially deter the interest principle repayment.................................

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