Case 13-6 Butler Luber Company
Please complete the following from the textbook:
�Case 13.6 Butler Lumber Company
This case has been selected to give you an opportunity to apply financial analysis to a firm. To do this
you will use the firm’s published financial and select financial ratios to make a determination about the
case. (Please look at the case questions for guidance on the types of questions you should be
focusing on when doing your analysis.)
Please note that there is an attached spreadsheet that has much of the necessary financial
information for this case.
Remember that these cases are not to be presented in a question and answer format. Use the case
template as a guide on how to write your case solution.)
Finally, copying solutions from the Internet is plagiarism; doing so can result in a grade of zero, and
may result in your flunking this course. Please do not copy solutions from others or from materials
CASE 13-6 BUTLER LUBER COMPANY 2
found on the Internet. Your instructors have access to tools that make it very likely they will find any
instances of plagiarism.
Case 13-6 Butler Luber Company
The firm is doing well in terms of growth because the numbers indicate that the firm
has managed to gain growth in its sales. However, a firm’s performance should not be
measured only on how its sales volumes are growing over the years. Other factors such as
return on investment are also important. Return on investment, when calculated well and
honestly, can help very useful in terms if explaining how well the firm is utilizing its
investment (resources) (Jiambalvo, 2009). In the case of the Butler Lumber, this does not
indicate an effective use of resources. Other metrics such as residual income indicate how
well the firm is growing its portfolio from trading. This is the residual income after all the
costs have been met (as well as stock dividends have been paid in the case of a public
company) (Jackson, Sawyers, & Jenkins, 2007). For Butler Lumber, this is not the case
because despite the fact that the firms is growing in terms of sales volumes, it has not been
CASE 13-6 BUTLER LUBER COMPANY 3
grow its portfolio. At the same time, its profitability is also not growing as the sales are
growing. This is probably because of the ineffective use of leverages financing.
A look at the books of accounts for Butler Lumber indicates some problems within
the firm. First, his cash flow is not ell managed because of two major issues.
Account payable set to 10 days
Mr. Butler seems to be so enthusiastic about using finical leveraging without at the
same time understanding the economic concept of leveraging the fiancés. With regard to
accounts payable, most businesses that offer credit give a minimum of 30 business or
calendar days. Paying these debts any earlier than the provided data is losing out on the
leveraging. It is even worse if the trade credits are offered at an interest rate which means that
he will have to pay the interest rate even though the did not benefit from the credit. This may
only be present if the interest rates were reduced if he days early. However, if the interest
rates remain the same regardless of whether he pays early or not he should be able to take as
much advantage of the dread it leveraging as possible. The main point of taking any type of
leverage is to make sure that the business can make some money off the leverages financing
before paying out. The profits from the leveraged financing should be more than the cost of
the financing (Mowen, Hansen, & Heitger, 2015). However, in Butler’s case, this does not
seem to be the case. Even worse, he does not seem to understand this principle.
Using loans to pay off trade credit
He also uses loans from the bank to pay off his credit notes, which means that he is
having to pay interest twice but getting very little. As see in the balance sheet, the cost of
credit is jut too high and this has been caused by the fact that the business sis using the wring
method in leveraging. He seem to forget that leveraging comes with a cost and it is only when
CASE 13-6 BUTLER LUBER COMPANY 4
this cost is well met that the leveraging can work for the business. Using one loan to off set
another loan is definitely not prudent.
Butler’s appetite for leveraging is also what is pushing him to wan to take the big loan
of 465 hounded. This intention not take the big loan is not justified. The problems is that the
banks will not care whether the loan will be of benefit to the firm, as long as they are satisfied
that he has the capacity to repay the loan and the interest it is attracting, they will be more
than happy to give the loan because that is profitable to them. However, this will not
necessary mean that his business is going to benefit from the financial leveraging. At the
same time, just because the business is in a position t repay the loan does not mean that it is
benefiting from the loan. The expansion hat Butler intents to have is way too much for him to
undertake in one step. First, to take such a loan would first require the business to do a due
diligence to investigate if there is enough market in for the business to expand at that rate.
Taking such a huge loan without any prospects of growth in the volume of sales will means
that the loan will not be able to be used to benefit the business. Yet, regardless of whether the
loan is able to help the business to expand its production and sales or not, the interest rates
will still have to be paid and this will mean that it is possible that the firm will be paying an
interest for a loan that it did not benefit from. It is necessary to note that the bank is doing a
due diligence to determine whether Butler or his business is able to repay the loan and the
interest. The bank is not doing a due diligence to determine if the business will benefit from
the loan. It is for the firm to do its own due diligence. In order to determine how much loan it
needs in order to benefit from the loan.
Butler should continue with his expansion shame but should be very careful in the
way he approaches in expanding a business is one thing that can lead to problems if the
market is not ready for a fast paced expansion. In this regard, what the firm can do is to make
sure that it has investigated the market. At the end, what will determine how successful the
CASE 13-6 BUTLER LUBER COMPANY 5
expansion bid is the readiness of the market (Weygandt, Kimmel, & Kieso, 2009). In this
regard, the firm should look at how much room for expansion there is in the market and then
know how much loan is needed for this expansion. This will help the firm to be able to take a
loan that will help it have a prudent way of financial leveraging instead of taking a huge loan
that will not be effectively utilized. The firm should not take the entire loan of 465 thousand
dollars but should only take a loan of lesser amount. Instead of concentrating on taking a big
loan, what the firm should look for is better terms of the loan such as lower interest rates, and
flexible repayment schedule. Because the loan is being used for expanding the business, it
would be necessary to make sure that the repayment of the loan is flexible and that the bank
accepts to give a grace period in case the expansion bid does not succeed as soon as the
expansion plan is implemented.
References
Jackson, S., Sawyers, R., & Jenkins, G. (2007). Managerial Accounting: A Focus on Ethical
Decision Making. New York City, NY: Cengage Learning.
Jiambalvo, C. (2009). Managerial Accounting. New York, NY: John Wiley & Sons.
Mowen, M., Hansen, D., & Heitger, D. (2015). Cornerstones of Managerial Accounting.
London, UK: Cengage Learning.
Weygandt, J., . Kimmel, P., & Kieso, E. (2009). Managerial Accounting: Tools for Business
Decision Making. New York, NY: John Wiley & Sons.
