March 22, 2021.

Case 1

Wilson Lumber
Company
DAHARE Likhendra, ERMAKOVA Aleksandra, LYAN Gentiane, TALBI Maria, TULISOVA
Alina, VASQUEZ Laurena
 Reasons for the need of additional borrowing
Purchase of materials with Increase in accounts and
discounts (time reason) notes payable

Successful price Shortage of cash*

competition

Growth in accounts Purchase of Mr.

Rapid growth in business receivable Stark's interest

Investment in
working capital
1984 1st Q 1985
*
Notes payable - trade - 110
Accounts payable 179 170
Accounts receivable 222 241
 Reasons for the need of additional borrowing
Although the company seems to be profitable , it has reached its maximum size with the current level
of working capital.

Without additional investment it will not be able to grow further or even stay on the same market
position as it will not be able to:

Build up inventory for prospective Pay suppliers in time in order to get customer orders
discounts. Without discounts it would lose its
competitive advantage of low prices resulting in decrease of market share.

Additionally higher volume of debt increases the amount of tax savings - thanks to tax shield –
 What is the cost of trade credit?
 During the discount period, the cost of trade credit is 0.
 After the discount period, the cost of trade credit increases for the buyer and then starts decreasing till
the final due date reaches.

Cost of trade credit =

 If Mr. Wilson pays on the 25th day, the cost of trade credit will be:

 By not taking the discount, Mr. Wilson is paying 63,64% annually to finance the purchase.
 What is the cost of trade credit?
This graph shows the cost of trade credit by the day when the transaction is done.

When the discount period is over, the cost of trade credit comes down as the day of account approaches,
and it will be the lowest on the day of account (called “net day”).
Will the proposed credit line cover WL’s 1985
needs?
Working capital required in 1985 is $259K on average

 Forecast of COGS and OPEX is based on the historical data (as % of revenue)

 Reduction of AP to only 10 days together with purchase discount provided doesn’t lead into funding
issues.
The credit of $325K is be able to cover the funding needs
Will the proposed credit line cover WL’s 1985
needs?
Alternative options to Increasing leverage
 Would you lend 325 000 $ to WL ?

Collaterals and guarantees Strong and rapid growth Consistent Cash Flows even
in an economic downturn

High account receivables High inventory

Exhibit.1 operational efficiency (6th que.)