Instructions

Your job is to evaluate the loan application being made by Mark Cartwright and the Cartwright Lumber company. Please read through the case and answer the following question prompts. You dont need to do a full essay style writeup. Simply answer the following question prompts with a simple description, including a brief description of your calculations. If the prompt calls for creating a table, please create a small formatted table in a spreadsheet and copy only the table into into your writeup. You dont need to be super-detailed, but the table should be formatted well enough to be reasonably self-explanatory to the grader.

1. Using the provided Balance Sheet and Income Statement for Cartwright Lumber, please create a simple Cash Flow statement for the years 2002, 2003, and Q1 of 2004, separating out the items into Cashflow from Operations, Cashflow from Investing, and Cashflow from Financing.

   For simplicity treat the various Notes payable and all the Long-term debt as a single debt-financing cashflow item, including the original loan payable to Henry Stark.

   Break out the changes in inventory, accounts receivables, accounts payable, and accrued expenses as separate cash items (rather than grouping them into a single working capital item).

   In case you are unfamiliar with spreadsheet modeling, note that the fastest way to calculate the cashflow items for all periods is to reference the cells from the income statement and balance sheet directly for your 2002 calculations using a relative reference (i.e. without the dollar signs) and then copy those operations to the right. Thus you should only need to impute the resulting cashflow items once.

2. Calculate the pre-tax, pre-interest (EBIT) return on assets for each full year. Also calculate the return on invested capital, which in this case is the shareholders equity (in the exhibit, Net Worth) and the interest bearing debt (the Notes payable and the total long-term debt.)
   • What can you say about these two numbers relative to the interest rate on the proposed loan?
   • If Cartwright Lumber is proposing to use the revolving loan help finance its purchases so that it can continue its rapid growth, what will happen to these numbers?
3. As noted in the case, Cartwright Lumbers rapid expansion has resulted in it carrying its payables for longer than it would like, effectively using its payables as an unintended form of financing. Part of the reason for soliciting this revolving loan is so that it can pay its suppliers promptly and take advantage of the 2% discount.
   • Assume that Cartwright Lumber currently extends its payables by around 40 days. If Mr. Cartwright pays within 10 days, he receives a 2% discount from his suppliers. Mr. Cartwright is therefore paying an implicit cost to for borrow money for 30 additional days. What is this cost on an annualized basis? (Use the 360 days/year convention. You may assume either a simple or compound rate convention, but if you use the simple convention make sure to say so.)
   • Assume instead that Mr. Cartwright is able to extend his payables all the way out to 55 days. What is this cost on an annualized basis?
   • Qualitatively, what implications does this have for the company if it is able to use the proceeds from bank financing to promptly pay its suppliers?