Hampton Machine Tool Company
By: adbrown4 • Essay • 1,281 Words • November 10, 2014 • 1,228 Views
Hampton Machine Tool Company
Hampton Machine Tool Company
Hampton Machine Tool Company was starting in 1915 as a manufacturing company providing parts to both military and automobile companies. Hampton Machine had been subject to severe cyclical fluctuations in the years leading up to 1978 when they requested a $1 million loan for repurchasing declining company stock. During the 1960’s, the company experienced high growth and profitability due to strong automobile market and heavy defense spending to finance the Vietnam War. As a highly cyclical subjected company, Hampton Machine would soon face a decline in growth and sales.
In the mid-1970s, defense spending was cut dramatically after the end of the Vietnam War along with a large decline in capital spending markets (automobile). This caused many of Hampton’s competitors to give way to the declining market ultimately providing an increased market share for the Hampton Machine Tool. In 1978, Hampton suffered a mild setback as sales below full capacity.
Hampton Machine Tool applied and was approved for a $1 million loan to repurchase stock at the end of December 1978. The loan was to be repaid by September 1979 with monthly interest payments remaining 1.5% of principle. Although profitable, Hampton would not be able to repay this loan by September due to a backlog of unfilled orders summing to $16.5 million. Inventories have increased dramatically due to delayed shipment of electronic components from their supplier. Raw material purchases of $420,000 were made before any immediate demand. Hampton operates as a conservative business but now is in a bind where new equipment needs to be purchased summing to $350,000. This comes as a necessity for Hampton to be able to operate at full capacity in the coming months. An additional loan of this amount would allow them to purchase new equipment and avoid a major equipment malfunction.
Mr. Cowin of Hampton Machine Tool Company has included the company’s financials in the loan request letter sent to the bank. Using this information we have prepared multiple forecasted financial statements including a projected cash budget, pro forma income statement, and pro forma balance sheet. After reviewing the results of these financial statements we do not believe that Mr. Cowin would be able to repay the $350,000 loan in the amount of time allotted. There is simply not enough inflow in the month of December to support paying back the loan.
HMTC Projected Cash Budget | September | October | November | December | |
Reciepts (inflows) | |||||
Collection of A/R | $684,000 | $1,323,000 | $799,000 | $1,604,000 | |
Loan from Bank | $0 | $350,000 | $0 | $0 | |
Total Inflows | $684,000 | $1,673,000 | $799,000 | $1,604,000 | |
Disbursments (outflows) | |||||
Payment of Accounts Payable | $948,000 | $600,000 | $600,000 | $600,000 | |
Misc. Operating Outlays | $400,000 | $400,000 | $400,000 | $400,000 | |
Tax expense | $181,000 | $0 | $0 | $181,000 | |
Interest Expense on Loan | $15,000 | $15,000 | $20,000 | $20,000 | |
Principle Repayment on Loan | $0 | $0 | $0 | $1,350,000 | |
Dividend Payment | $0 | $0 | $0 | $150,000 | |
Total Outflows | $1,544,000 | $1,015,000 | $1,370,000 | $2,701,000 | |
Beginning Cash Balance | $1,559,000 | $699,000 | $1,007,000 | $766,000 | |
Net Cash Reciepts | -$860,000 | $308,000 | -$240,000 | -$1,097,000 | |
Ending Cash Balance | $699,000 | $1,007,000 | $766,000 | -$331,000 | |
Proposed Solution | |||||
December | January | ||||
Reciepts (inflows) | |||||
Collection of A/R | $1,604,000 | $2,265,000 | |||
Loan from Bank | $0 | $0 | |||
Total Inflows | $1,604,000 | $2,265,000 | |||
Disbursments (outflows) | |||||
Payment of A/P | $600,000 | $600,000 | |||
Misc. Operating Outlays | $400,000 | $400,000 | |||
Tax Expense | $181,000 | $0 | |||
CapEX | $0 | $0 | |||
Interest on Loan | $20,000 | $20,000 | |||
Principle Repayment of Loan | $0 | $1,350,000 | |||
Dividend Payment | $150,000 | $0 | |||
Total Ouflows | $1,351,000 | $2,370,000 | |||
Beginning Cash Balance | $766,000 | $513,000 | |||
Net Cash Reciepts | $253,000 | -$105,000 | |||
Ending Cash Balance | $513,000 | $408,000 |