ill a credit line of $750,000 be sufficient to meet the company’s needs in 1996 if it takes the trade discounts?
Clarkson Lumber Company
After a rapid growth in its business during recent years, the Clarkson Lumber Company, in the spring of 1996, anticipated a further substantial increase in sales. Despite good profits, the company had experienced a shortage of cash and had found it necessary to increase its borrowing from the Suburban National Bank to $399,000 in the spring of 1996. The maximum loan that Suburban National would make to any one borrower was $400,000 and Clarkson had been able to stay within this limit only by relying very heavily on trade credit. In addition, Suburban was now asking that Mr. Clarkson guarantee the loan personally. Keith Clarkson, sole owner and president of the Clarkson Lumber Company, was therefore actively looking elsewhere for a new banking relationship where he would be able to negotiate a larger loan that did not require a personal guarantee.
Mr. Clarkson had recently been introduced by a friend to George Dodge, an officer of a much larger bank, the Northrup National Bank. The two men had tentatively discussed the possibility that the Northrup bank might extend a line of credit to Clarkson Lumber up to a maximum amount of $750,000. Mr. Clarkson thought that a loan of this size would improve profitability by allowing him to take full advantage of trade discounts. Subsequent to this discussion, Mr. Dodge had arrange for the credit department of the Northrup National Bank to investigate Mr. Clarkson and his company.
1. Will a credit line of $750,000 be sufficient to meet the company’s needs in 1996 if it takes the trade discounts? (You will need to construct pro forma statements to support your answer.)
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