Hampton Machine Tool Company, a machine tool maker, was founded in 1915. Until 1979, the company had successfully forecasted the terrible cyclical fluctuations feature of the industry. The company ‘s primary client base included the aircraft and car makers in the St. Louis country. During the mid – to late 1960s, Hampton was really profitable due to a strong car market, and, to the heavy defence disbursement associated with the Vietnam War. However, in the mid-1970s, Hampton ‘s profitableness slowed down with the United States ‘ backdown from Vietnam War and the oil trade stoppage. By the late seventiess, they had a larger portion in the market due to their rivals who were unable to do it through these hard times, while Hampton managed to stabilise.
Ten old ages prior to December, 1978, the company had no debt because it had conservative fiscal policies, which maintained a strong on the job capital place as a buffer against economic uncertainness. In December,1978, Hampton requested a $ 1 million loan from the St. Louis National Bank. The loan ‘s footings were a monthly involvement payment at a rate of 1.5 % , with the principal to be paid back at the terminal of September, 1979. Now ( September of 1979 ) , Benjamin G. Cowins, president of Hampton, has asked to regenerate the initial loan until terminal of 1979, and, has requested an extra loan of $ 350,000 with promise of refund at the terminal of December, 1979 with an involvement rate of 1.5 % per month. This extra loan is required for an update of their machinery which has n’t been done since the economic system went into a recession in the early 1970s.
For the last several months, Hampton ‘s cargo agenda has been upset because they have had to wait for parts from their providers. On August 31, the accretion of seven machines cost about $ 1,320,000, in add-on to the installing cost for these parts. They received the parts last hebdomad, and will be able to finish a figure of machines within following few hebdomads. The decrease in work in advancement of about $ 1,320,000 is due to non having the electronic control mechanisms on clip. However, the balance of their work in advancement stock lists will likely stay steady for the foreseeable hereafter because of their capacity rate of production.
In July and August, Hampton bought natural stuffs beyond their immediate demands to be assured of finishing their order agenda to be shipped by the terminal of the twelvemonth. Therefore, they presently have accumulated about $ 420,000 worth of scarcer constituents above their normal natural stuffs stock lists. They estimate it will be used by the terminal of the twelvemonth. Because they bought in front this manner, they expect to cut natural stuff purchases to about $ 600,000 a month in each of the four staying months of 1979.
The company ‘s revised cargo estimations are: September, $ 2,163,000 ; October, $ 1,505,000 ; November $ 1,604,000 ; December, $ 2,265,000. The cargo estimates include a $ 2,100,000 order for the General Aircraft Corporation. Hampton is now scheduled to transport against this order as follows: September, $ 840,000 ; October, $ 840,000 ; November, $ 420,000. Because General Aircraft gave Hampton an beforehand payment of $ 1,566,000 on this order, the company will be due nil on these cargos until their $ 1,566,000 recognition with Hampton is exhausted.
Hampton ‘s presuming accumulations will stay about the same on August 31, and their monthly spending for all disbursals other than involvement and natural stuffs purchases should be around $ 400,000 per month. Due to hapless economic conditions and the company ‘s desire to conserve hard currency ; they have spent little on new equipment in the last several old ages, 1979. This has contributed slightly to the troubles they have had in keeping production at full capacity this twelvemonth. As a consequence, Hampton has requested an extra $ 350,000 loan at an involvement rate of 1.5 % monthly, with promise of refund at the terminal of December, 1979. This loan is necessary to buy certain needed equipment to keep the production. The revenue enhancement people estimated the equipment will measure up for a 10 % investing revenue enhancement recognition. The company is scheduled to pay $ 181,000 in revenue enhancements on September 15 and December 15. Besides, Mr. Cowins has suggested paying $ 150,000 dividends to shareholders in December.
The Hampton Machine Tool Company is confronting jobs in paying its $ 1 million loan and bespeaking for a new loan from the St. Louis National Bank. By following Mr. Cowins ‘ program, the company will be short $ 332,000 ( Exhibit 1 ) in December. Hampton, a profitable house, has fallen behind on their orders, and Mr. Cowins recommends that they need more funding to buy certain needed equipment. Hampton has notified the St. Louis National Bank that they will non be able to refund in September. Besides, they have requested an extension. For the past month or more, Hampton has been runing at full capacity, and with extra dorsum orders, which has put them behind in their cargo of orders. In add-on, their cargo agenda has been upset because they have been waiting for electronic control mechanisms from their providers. The falling buttocks has besides caused them to hold less than what is needed for histories receivables turnover.
The hard currency budgets and statement of beginnings and uses yield negative consequences refering the chief payment of the loan for December ( Exhibit 1 ) , based on Mr. Cowins ‘ program. This analysis is based on jutting gross revenues, dividend payments and revenue enhancement payments. Consequently, the gross revenues undertakings and histories receivables are 30 yearss net ; if non paid on clip, so this could alter the consequences significantly by seting the company in more of a fiscal bind. Based on my prognosiss it seems that Mr. Cowins is wrong about being able to refund the loan in December, but Hampton should be able to refund in January with more precise planning.
Hampton used the initial loan plus $ 2 million in extra hard currency to buy back a significant fraction of its outstanding common stock, because it had decreased sufficiently in value. Although they had good purposes to increase the company ‘s stock value, their fundss have suffered because of the redemption. Mr. Cowins ‘ offer to pay $ 150,000 in dividends in December is non sensible, because Hampton ‘s fundss will endure, doing them to hold negative hard currency flows. ( Exhibit 1 )
It is obvious that Hampton can non afford to refund the loan in December, if they proceed with their original programs. The company will hold a negative hard currency flow in December harmonizing to Exhibit 1. They should bespeak a one-month extension on the loan, as they can non afford to do a loan payment in December. Widening the loan refund one month until January allows for history receivables of December to go gathered, because of the company aggregation policy of 30 yearss net. This means Hampton will non hold to travel into the negative to pay the loan in December, maintaining hard currency flow at an expectable degree which is $ 1,168.50. ( Exhibit 2 )
Hampton can non afford to do a dividend payment in December, irrespective of their willingness to make so. Canceling the dividend payment will liberate up $ 150,000 in December, maintaining the net hard currency flow in the positive ( Exhibit 2 ) , which compensates for the $ 350,000 loan payment. This besides helps maintain the net hard currency flow positive in December, every bit good as waiting for histories receivables of $ 2,265,000 to come in January for the concluding payment. This makes the company profitable for the hereafter, and, in bend, the stock will non go valueless.
My recommendation for Hampton Machine Tool Company is they should bespeak a one month extension on the loan, and call off the dividend payment to do the company more profitable. Besides, this would beef up Hampton ‘s relationship with the bank by paying off both loans.
Based on the forecasted hard currency budget, Mr. Jerry Eckwood, vice-president of the St. Louis National Bank, should reject the $ 350,000 loan petition based on the current footings proposed by Hampton Machine Tool Company. Harmonizing to Exhibit 1, there is an inability to refund the initial loan. The Numberss fall short of being able to refund the original loan in December without even sing the requested loan. However, with the proper fiscal accommodations, both loans can be to the full repaid by January. For relationship grounds, Mr. Eckwood may desire to allow the loan, every bit long as the footings are reworked to assist warrant, that the bank will acquire paid. The extension of the loan and cancelation dividends will go forth Hampton in a manageable state of affairs, leting them to go on to be a profitable client of the bank. The St. Louis National Bank should convey up the solutions that I mentioned above, but Mr. Eckwood will desire to do certain that the bank puts Hampton on a refund program, so, that in the close hereafter they can anticipate to roll up the principal of the outstanding loans.
If I was the St. Louis National Bank, I would hold to reject the loan on the current footings proposed by Mr. Cowins, because the Hampton Machine Tool Company shows an inability to refund the loan, based on the Numberss they have forecast.