Write a Memo and Executive Summary for the following Case: In March of 2016, Roseanne Chang, vice president of the Easte
Posted: Tue Nov 16, 2021 8:28 am
Write a Memo and Executive Summary for the following Case:
In March
of 2016, Roseanne Chang, vice president of the Eastern Ontario
Region of the Dominion Bank of Canada, was reviewing the file of
Lemay Hometown Lumber Company, one of the regions largest
borrowers. The following day, Larry Lemay and Linda Limeric, the
president and controller, respectively, of Lemay Hometown Lumber
Company, would meet with the bank’s loan committee, to present a
request for a line of credit of up to $10 million dollars. The line
of credit was in addition to the term loan they already had with
the bank. The loan committee, consisted of Chang, the central
credit manager, and the assistant central credit manager, would
review the loan request and make a recommendation to the bank’s
board of directors. Their recommendation would be the bases
for the bank’s decision regarding the Lemay Hometown Lumber’s
request.
PRE –
2016
The Lemay
lumber Company was founded by the Lemay family in 1870 to market
the lumber produced from the trees on their land. After the
original lumber stands were depleted near Palmerston Ontario, they
continued to operate a wholesale lumber business and it was slowly
expanded. In 1950 Lemay Lumber owned and operated four lumber yards
in the Palmerston, Harriston and Arthur area. Although owned by
Lemay Lumber each was a separate company operating
independently.
In 2000
Leroy K. Lemay became president and amalgamated the four lumber
companies into Lemay Hometown Lumber Company Limited. The company
then acquired seven additional lumber yards to the north and west
of Palmerston Ontario, however further growth was limited by Leroy
K. Lemay’s belief that further expansion should only be funded by
internally generated funds. For over 100 years Lemay Lumber had
been dealing with the Fergus branch of the First Capital Bank of
Canada, and in 2015 had borrowed $1.5 million to meet the inventory
requirements for their seasonal demand for building materials an
meet their seasonal sales. From April until November 77 per cent of
their sales were evenly spread over these months, while the
remaining 23 per cent was distributed evenly between December and
March. Lemay Lumber’s sales between the years 2005 and 2015 were
from $10 million to $15 million, with 90 per cent being wholesale
sales to the residential construction trades. Exhibit 1 shows the
before tax profits from 2005 to 2015.
In 2011
L.K. Lemay, realized that due his poor health he would not be able
to manage the company any longer. His son Larry Lemay, agreed to
take over as president of the company. Larry Lemay had actually
taken over the business in 2010 when his father actually became too
sick to perform his duties as president. After his father returned
Larry assumed the advertising and budgeting responsibilities for
the company
2014 and
2015
Larry
Lemay had a postgraduate degree in Business Administration and
several years teaching experience. When he took over as president
of the company Lemay Hometown Lumber Company was primarily a
wholesale lumber business and was subject to the volatility
of the residential housing market. Exhibit two outlines the
selected ratios for the wholesale lumber industry. The new
president was of the opinion that with a few changes in inventory
and yard operations , the company would be able to take advantage
of the growing retail market for building products and thereby
stabilize their operations.
Lemay
approached the company’s banker, the branch manager of the Fergus
branch of the First Capital Bank of Canada, to finance the proposed
changes in the company. However the Fergus branch manager would
only support a seasonal loan to finance inventory, and refused to
pass on the loan request to his superiors.
Consequently, Larry Lemay took the loan application to the
Dominion Bank of Canada, along with his plans and needs. In 2013,
The Dominion Bank of Canada granted an initial line of credit for
$3 million to be used as working capital. The Dominion Bank took
the accounts receivable and inventory as collateral , and, as a
condition of the loan, Lemay Hometown Lumber was required to
provide the bank with quarterly financial statements and monthly
reports of inventory, sales and receivables.
Larry
Lemay, also reorganized the company’s 11 branch operations into 3
divisions or regions. The first Northern Region, which serviced an
urban market, consisted of three lumber yards in the Owen Sound
area. Four lumber yards in the Palmerston area formed the central
region, and four lumber yards in and around Elmira formed the
Western Region. The Eastern Region was primarily a rural market,
while the Northern Region was partly a resort and a partially an
urban market. In an attempt to minimize inventory one branch in
each region was dedicated and operated as a depot. A fleet of
trucks kept frequent and regular scheduled runs between the depots
and the lumber yards to provide rapid deliveries to the
customers.
Each
region was under an area manager whose responsibility it was to
supervise the regions branches. The supervisors had years of
experience working in the company’s lumber yards. A management
committee, consisting of the president, controller and area
supervisors, met on a monthly basis, to discuss operational
strategies. The committee also set the budgets for each branch
every four months. Exhibits 3, 4, and 5 outline the company’s
financial statements ratios for the years 2013 to
2015.
2015
PROJECTIONS
Exhibit 6
outlines the projected capital expenditures for 2015 and 2016. The
projected 2015 projected capital expenditures of $1.8 million were
primarily to upgrade and improve the company’s showrooms and
display areas. Depreciation and profits were expected to cover
these capital expenses. A sales increase was projected for 2015 of
$6.4 million. This projection was based on the opinions of, the
building contractors, Lemay’s yard managers, and business
publications reporting on the outlook for the economy and the
projected housing market. Operating profits were anticipated
to be $2.92 million, assuming a gross margin of 30 per cent and
expenses of $6.08 million. To finance an increase of $2.52 million
in receivables and inventory, a total operating line of credit of
$3.6 million for working capital was requested and granted by The
Dominion Bank.
2015
ACTUAL
After
studying the market for over six months, and researching the
potential of the Owen Sound area, and discussing the revised
capital budget with the bank, Lemay Hometown Lumber opened a
discount home center in September of 2025. To finance this new
operation, the bank granted a term loan of $4.2
million.
The new
discount home center was geared toward the retail home market.
Exhibit 7 presents selected ratios for the retail building
materials and hardware industry. The concept enabled customers to
purchase, at one location, all types of building and hardware
supplies, such as tiles, wallpaper, carpet, lumber, plumbing
supplies including fixtures. Electrical supplies as well as
lighting fixtures. Each item in the store was clearly marked with
two separate and distinct prices so customers paid only for the
services they desired. The regular price was for the customer could
charge their purchases and have them delivered. The discount or
cash and carry price was just as it states, the customer paid cash
and left with their purchases. There was also a third price charged
for those customers who wished to pay cash for their goods and then
have them delivered. The new store’s sales for the first two months
of operation was $2.28 million.
Sales in
2015 were $2,680,000 greater than projected and capital
expenditures were $3,600,000 over budget. In addition to granting
the term loan, the Dominion Bank also increased the company’s line
of credit to $5 million.
2016
PROJECTIONS
For 2015
Larry Lemay projected a 65 per cent increase in sales to $54
million and an operating profit of 8 per cent of sales. To finance
inventories and receivables of up to $24 million in June and July,
an operating line of credit of $10.8 million was requested from the
Dominion Bank.
THE
DOMINION BANK
As she
reviewed the file, Chang looked for any indicators that the bank
should increase its protection of the loan. She particularly noted
the company’s profits since 2011 and her predecessor’s confidence
in the Lemay management team. However Chang, closely examined
Lemay’s projections for 2016. She questioned the accuracy of these
projections, due to the fact that 65 per cent of Lemay’s sales were
to contractors in the new housing market, meaning the company was
still dependant on this housing market. Total housing starts in
Canada were 138,000 in 2015 compared to 148,000 in 2014. New
housing construction had slowed slightly in the first two months of
2016, attaining roughly 97 per cent of the starts reported in the
first two months of 2015. Five year mortgage interest rates had
risen slightly in February 2016, from 6.85 per cent to 6.9 per
cent, although she noted an overall downward trend over the past
decade. As Roseanne examined this information, she wondered if she
should recommend the increase in their operating line of credit of
Lemay Lumber and if so by how much and under what terms as to
collateral and management growth plans.
In
In March
of 2016, Roseanne Chang, vice president of the Eastern Ontario
Region of the Dominion Bank of Canada, was reviewing the file of
Lemay Hometown Lumber Company, one of the regions largest
borrowers. The following day, Larry Lemay and Linda Limeric, the
president and controller, respectively, of Lemay Hometown Lumber
Company, would meet with the bank’s loan committee, to present a
request for a line of credit of up to $10 million dollars. The line
of credit was in addition to the term loan they already had with
the bank. The loan committee, consisted of Chang, the central
credit manager, and the assistant central credit manager, would
review the loan request and make a recommendation to the bank’s
board of directors. Their recommendation would be the bases
for the bank’s decision regarding the Lemay Hometown Lumber’s
request.
PRE –
2016
The Lemay
lumber Company was founded by the Lemay family in 1870 to market
the lumber produced from the trees on their land. After the
original lumber stands were depleted near Palmerston Ontario, they
continued to operate a wholesale lumber business and it was slowly
expanded. In 1950 Lemay Lumber owned and operated four lumber yards
in the Palmerston, Harriston and Arthur area. Although owned by
Lemay Lumber each was a separate company operating
independently.
In 2000
Leroy K. Lemay became president and amalgamated the four lumber
companies into Lemay Hometown Lumber Company Limited. The company
then acquired seven additional lumber yards to the north and west
of Palmerston Ontario, however further growth was limited by Leroy
K. Lemay’s belief that further expansion should only be funded by
internally generated funds. For over 100 years Lemay Lumber had
been dealing with the Fergus branch of the First Capital Bank of
Canada, and in 2015 had borrowed $1.5 million to meet the inventory
requirements for their seasonal demand for building materials an
meet their seasonal sales. From April until November 77 per cent of
their sales were evenly spread over these months, while the
remaining 23 per cent was distributed evenly between December and
March. Lemay Lumber’s sales between the years 2005 and 2015 were
from $10 million to $15 million, with 90 per cent being wholesale
sales to the residential construction trades. Exhibit 1 shows the
before tax profits from 2005 to 2015.
In 2011
L.K. Lemay, realized that due his poor health he would not be able
to manage the company any longer. His son Larry Lemay, agreed to
take over as president of the company. Larry Lemay had actually
taken over the business in 2010 when his father actually became too
sick to perform his duties as president. After his father returned
Larry assumed the advertising and budgeting responsibilities for
the company
2014 and
2015
Larry
Lemay had a postgraduate degree in Business Administration and
several years teaching experience. When he took over as president
of the company Lemay Hometown Lumber Company was primarily a
wholesale lumber business and was subject to the volatility
of the residential housing market. Exhibit two outlines the
selected ratios for the wholesale lumber industry. The new
president was of the opinion that with a few changes in inventory
and yard operations , the company would be able to take advantage
of the growing retail market for building products and thereby
stabilize their operations.
Lemay
approached the company’s banker, the branch manager of the Fergus
branch of the First Capital Bank of Canada, to finance the proposed
changes in the company. However the Fergus branch manager would
only support a seasonal loan to finance inventory, and refused to
pass on the loan request to his superiors.
Consequently, Larry Lemay took the loan application to the
Dominion Bank of Canada, along with his plans and needs. In 2013,
The Dominion Bank of Canada granted an initial line of credit for
$3 million to be used as working capital. The Dominion Bank took
the accounts receivable and inventory as collateral , and, as a
condition of the loan, Lemay Hometown Lumber was required to
provide the bank with quarterly financial statements and monthly
reports of inventory, sales and receivables.
Larry
Lemay, also reorganized the company’s 11 branch operations into 3
divisions or regions. The first Northern Region, which serviced an
urban market, consisted of three lumber yards in the Owen Sound
area. Four lumber yards in the Palmerston area formed the central
region, and four lumber yards in and around Elmira formed the
Western Region. The Eastern Region was primarily a rural market,
while the Northern Region was partly a resort and a partially an
urban market. In an attempt to minimize inventory one branch in
each region was dedicated and operated as a depot. A fleet of
trucks kept frequent and regular scheduled runs between the depots
and the lumber yards to provide rapid deliveries to the
customers.
Each
region was under an area manager whose responsibility it was to
supervise the regions branches. The supervisors had years of
experience working in the company’s lumber yards. A management
committee, consisting of the president, controller and area
supervisors, met on a monthly basis, to discuss operational
strategies. The committee also set the budgets for each branch
every four months. Exhibits 3, 4, and 5 outline the company’s
financial statements ratios for the years 2013 to
2015.
2015
PROJECTIONS
Exhibit 6
outlines the projected capital expenditures for 2015 and 2016. The
projected 2015 projected capital expenditures of $1.8 million were
primarily to upgrade and improve the company’s showrooms and
display areas. Depreciation and profits were expected to cover
these capital expenses. A sales increase was projected for 2015 of
$6.4 million. This projection was based on the opinions of, the
building contractors, Lemay’s yard managers, and business
publications reporting on the outlook for the economy and the
projected housing market. Operating profits were anticipated
to be $2.92 million, assuming a gross margin of 30 per cent and
expenses of $6.08 million. To finance an increase of $2.52 million
in receivables and inventory, a total operating line of credit of
$3.6 million for working capital was requested and granted by The
Dominion Bank.
2015
ACTUAL
After
studying the market for over six months, and researching the
potential of the Owen Sound area, and discussing the revised
capital budget with the bank, Lemay Hometown Lumber opened a
discount home center in September of 2025. To finance this new
operation, the bank granted a term loan of $4.2
million.
The new
discount home center was geared toward the retail home market.
Exhibit 7 presents selected ratios for the retail building
materials and hardware industry. The concept enabled customers to
purchase, at one location, all types of building and hardware
supplies, such as tiles, wallpaper, carpet, lumber, plumbing
supplies including fixtures. Electrical supplies as well as
lighting fixtures. Each item in the store was clearly marked with
two separate and distinct prices so customers paid only for the
services they desired. The regular price was for the customer could
charge their purchases and have them delivered. The discount or
cash and carry price was just as it states, the customer paid cash
and left with their purchases. There was also a third price charged
for those customers who wished to pay cash for their goods and then
have them delivered. The new store’s sales for the first two months
of operation was $2.28 million.
Sales in
2015 were $2,680,000 greater than projected and capital
expenditures were $3,600,000 over budget. In addition to granting
the term loan, the Dominion Bank also increased the company’s line
of credit to $5 million.
2016
PROJECTIONS
For 2015
Larry Lemay projected a 65 per cent increase in sales to $54
million and an operating profit of 8 per cent of sales. To finance
inventories and receivables of up to $24 million in June and July,
an operating line of credit of $10.8 million was requested from the
Dominion Bank.
THE
DOMINION BANK
As she
reviewed the file, Chang looked for any indicators that the bank
should increase its protection of the loan. She particularly noted
the company’s profits since 2011 and her predecessor’s confidence
in the Lemay management team. However Chang, closely examined
Lemay’s projections for 2016. She questioned the accuracy of these
projections, due to the fact that 65 per cent of Lemay’s sales were
to contractors in the new housing market, meaning the company was
still dependant on this housing market. Total housing starts in
Canada were 138,000 in 2015 compared to 148,000 in 2014. New
housing construction had slowed slightly in the first two months of
2016, attaining roughly 97 per cent of the starts reported in the
first two months of 2015. Five year mortgage interest rates had
risen slightly in February 2016, from 6.85 per cent to 6.9 per
cent, although she noted an overall downward trend over the past
decade. As Roseanne examined this information, she wondered if she
should recommend the increase in their operating line of credit of
Lemay Lumber and if so by how much and under what terms as to
collateral and management growth plans.
In