Hampton Machine Tool Company
Hampton Machine Tool Company
Hampton Machine Tool CompanyHampton 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 BudgetSeptemberOctoberNovemberDecember  Reciepts (inflows)Collection of A/R$684,000$1,323,000$799,000$1,604,000Loan from Bank$0$350,000$0$0Total Inflows$684,000$1,673,000$799,000$1,604,000  Disbursments (outflows)Payment of Accounts Payable$948,000$600,000$600,000$600,000Misc. Operating Outlays$400,000$400,000$400,000$400,000Tax expense$181,000$0$0$181,000Interest Expense on Loan$15,000$15,000$20,000$20,000Principle Repayment on Loan$0$0$0$1,350,000Dividend Payment$0$0$0$150,000  Total Outflows$1,544,000$1,015,000$1,370,000$2,701,000Beginning Cash Balance$1,559,000$699,000$1,007,000$766,000Net Cash Reciepts-$860,000$308,000-$240,000-$1,097,000  Ending Cash Balance$699,000$1,007,000$766,000-$331,000Proposed SolutionDecemberJanuaryReciepts (inflows)Collection of A/R$1,604,000$2,265,000Loan from Bank$0$0Total Inflows$1,604,000$2,265,000Disbursments (outflows)Payment of A/P$600,000$600,000Misc. Operating Outlays$400,000$400,000Tax Expense$181,000$0CapEX$0$0Interest on Loan$20,000$20,000Principle Repayment of Loan$0$1,350,000Dividend Payment$150,000$0Total Ouflows$1,351,000$2,370,000Beginning Cash Balance$766,000$513,000Net Cash Reciepts$253,000-$105,000Ending Cash Balance$513,000$408,000