Case Notes/Answers
Case Solutions for Clarkson Lumber Company
Discussion Questions:
1. To ascertain why the Clarkson Company is so short of funds despite its record of profitable
operations and, in this connection, to develop the distinction between profits and cash requirements.
2. To evaluate Mr. Clarkson's estimate of his loan requirements. To decide what size loan the
company needs and when it can expect to repay this loan.
3. To explore the wisdom of proceeding with a rapidly expanding level of operations despite the
heavy financial pressure such a policy would place on Mr. Clarkson. This question can be considered
from both the standpoint of Mr. Clarkson and that of the banker.
4 . All of these endeavors provide practice for students in developing skills in elementary financial
analysis and in sizing up a financial problem. Various incidental points can also be covered along the
way, such as the cost involved in forgoing purchase discounts and the unique problems of
interpreting the accounts of a corporation whose president is also its sole shareholder. Calculations of
corporate profitability must be done with full recognition of the cash salary and noncash perquisites
being drawn by the owner.
, 5-297-076
January 8, 1997
Clarkson Lumber Company
Teaching Note
The Clarkson Lumber Company has been expanding rapidly for several years. Increases in
working capital requirements have outrun the capacity of the company to generate funds from
internal sources. Part of the company's available funds have also been used by Mr. Clarkson to buy
out his partner, thereby further increasing the financial pressure on the company. The company has
been forced to forgo taking discounts on accounts payable and to borrow in increasing amounts from
its bank to maintain its expansion. Mr. Clarkson must decide whether to continue to expand and, if
so, how to raise the necessary funds. The alternative that he is actively considering is to seek a new
bank connection from which he can borrow larger, but secured, amounts than from his present bank.
The bank must estimate the amount of funds needed by Mr. Clarkson, the probable schedule of
repayment on its loan, and the nature and degree of the risks it would be incurring in lending to Mr.
Clarkson on the scale required. The appropriate terms for the loan from the standpoint of both
parties also need to be examined.
The Clarkson case can be used for many of the same purposes as the other introductory cases
in Case Problems in Finance. An important contribution of this case is that it emphasizes the
dichotomy between accounting income and cash requirements. It also provides a useful contrast to
most of the other cases in Part I: Although superficially in need of short-term funds, the Clarkson
Company actually needs long-term, or at least intermediate-term, financing.
The Clarkson case may be taught from the standpoint of either the banker or the borrower,
but (as an early finance case) the main teaching emphasis should appropriately be on Mr. Clarkson's
problems. This case is an update of the Butler Lumber Company case.
Pedagogical Objectives
1. To ascertain why the Clarkson Company is so short of funds despite its record of
profitable operations and, in this connection, to develop the distinction between
profits and cash requirements.
2. To evaluate Mr. Clarkson's estimate of his loan requirements. To decide what
size loan the company needs and when it can expect to repay this loan.
3. To explore the wisdom of proceeding with a rapidly expanding level of
operations despite the heavy financial pressure such a policy would place on Mr.
1
Case Solutions for Clarkson Lumber Company
Discussion Questions:
1. To ascertain why the Clarkson Company is so short of funds despite its record of profitable
operations and, in this connection, to develop the distinction between profits and cash requirements.
2. To evaluate Mr. Clarkson's estimate of his loan requirements. To decide what size loan the
company needs and when it can expect to repay this loan.
3. To explore the wisdom of proceeding with a rapidly expanding level of operations despite the
heavy financial pressure such a policy would place on Mr. Clarkson. This question can be considered
from both the standpoint of Mr. Clarkson and that of the banker.
4 . All of these endeavors provide practice for students in developing skills in elementary financial
analysis and in sizing up a financial problem. Various incidental points can also be covered along the
way, such as the cost involved in forgoing purchase discounts and the unique problems of
interpreting the accounts of a corporation whose president is also its sole shareholder. Calculations of
corporate profitability must be done with full recognition of the cash salary and noncash perquisites
being drawn by the owner.
, 5-297-076
January 8, 1997
Clarkson Lumber Company
Teaching Note
The Clarkson Lumber Company has been expanding rapidly for several years. Increases in
working capital requirements have outrun the capacity of the company to generate funds from
internal sources. Part of the company's available funds have also been used by Mr. Clarkson to buy
out his partner, thereby further increasing the financial pressure on the company. The company has
been forced to forgo taking discounts on accounts payable and to borrow in increasing amounts from
its bank to maintain its expansion. Mr. Clarkson must decide whether to continue to expand and, if
so, how to raise the necessary funds. The alternative that he is actively considering is to seek a new
bank connection from which he can borrow larger, but secured, amounts than from his present bank.
The bank must estimate the amount of funds needed by Mr. Clarkson, the probable schedule of
repayment on its loan, and the nature and degree of the risks it would be incurring in lending to Mr.
Clarkson on the scale required. The appropriate terms for the loan from the standpoint of both
parties also need to be examined.
The Clarkson case can be used for many of the same purposes as the other introductory cases
in Case Problems in Finance. An important contribution of this case is that it emphasizes the
dichotomy between accounting income and cash requirements. It also provides a useful contrast to
most of the other cases in Part I: Although superficially in need of short-term funds, the Clarkson
Company actually needs long-term, or at least intermediate-term, financing.
The Clarkson case may be taught from the standpoint of either the banker or the borrower,
but (as an early finance case) the main teaching emphasis should appropriately be on Mr. Clarkson's
problems. This case is an update of the Butler Lumber Company case.
Pedagogical Objectives
1. To ascertain why the Clarkson Company is so short of funds despite its record of
profitable operations and, in this connection, to develop the distinction between
profits and cash requirements.
2. To evaluate Mr. Clarkson's estimate of his loan requirements. To decide what
size loan the company needs and when it can expect to repay this loan.
3. To explore the wisdom of proceeding with a rapidly expanding level of
operations despite the heavy financial pressure such a policy would place on Mr.
1
