About The Company
Hampton Machine Tool was established in 1915 and has actually been making machine tools given that its foundation. Hampton company’s customer base is comprised primarily of airplane manufacturers and auto produces in the St. Louis location. It experienced record production and success throughout the years. Sales and profitability decreased in the mid-1970s with the withdrawal from Vietnam War and the oil embargo. However, the company had supported the massive of sales by the late 1970s. The reasons of Hampton’s recovery were the increasing number of military aircraft sales in both export and domestic markets, the automobile industry increasing and an improvement in the economy.
Summary of The Issue
Hampton Maker Tool Business have problems with the repayment of its $1million loan due date of September 1979. The loan was utilized for the stock repurchase. Thanks to the president of Hampton Company-, Mr.Cowin’s great credibility and the reliability in business community and submission of projected sales and forecasted financial declarations St.
Louis National Bank gave the loan to the business. There were numerous aspects caused the failure of forecast sales including firstly, the detention of shipment by the significant component supplier on time, secondly, the purchase of $420,000 worth of elements over normal level of stock, thirdly, issues of makers happened throughout the production duration. On the other hand, the company plans to pay a dividend of $150,000 in 1979. Therefore, Hampton needs an additional loan of $350,000 till October to be paid on December 1979 along with the preliminary loan Analysis
The bank ought to make choice by the end of the October due to the maturity date of the preliminary loan.
To assess the borrower’s ability for the repayment Pro-forma Financial Statements, Profitability ratios, Liquidity and take advantage of ratios, and projected money spending plan ought to be evaluated.
Projected Cash Budgets and Proforma Financial Statements yield unfavorable outcomes about the primary payment of the loan for December 1979. The forecasts of this analysis are based upon predicted sales, one month extension of the loan and dividend payment, and starting to repay the loan early.
Projected Sales
If sales projections and accounts receivables are not met, this situation will be worse than the present one financially. But as we can see in the projected cash budget, ending cash balance in December is negative so that Hampton will be unable to repay the loan on that time. On the other hand repayment in January will be possible with more accurate planning.
Liquidity Ratios
The reason of the paradox of increasing current ratio and net working capital but decreasing quick ratio is the increasing level of inventories Activity Ratios The average age of inventory improved as a result of an increase in inventories. The company has a stock of row materials, and there are additional inventories waiting for the production process. The receviables management seemed to improve but collection in July and August needs a concern and a further study should be undertaken.
Profitability Ratios
Although there is unstable trend, Hampton Company’s profit ratios seems as its best visible to the company’s increase on its Net Profit Margin both in history and projection.
Dividend Payment
The company repurchased a substantial fraction of its outstanding common stock. Despite the good purposes about increasing the stock value, they had to make a loan of $1 million for he purchase. Because of the unreasonable conditions to pay dividends in December, the company will have a negative cash flow.
Solution
We inferred from the financial statements that the company can not afford to repay the loan in December, otherwise they will have negative cash flow. However, all the financial statements have consistency among them showing this declining trend. They should offer a one month extention on the loan to indicate a reasonable solution and then should start repaying it early.
The repayment process should be started
Payment of $200,000 in September
Payment of $100,000 in October
No payment in November
Payment of $350,000 in December
These payments reduce the interest and final loan payment.
Another solution is about the extention of one month till January with the final repayment of $700,000 once December accounts receivables are collected. Hampton will not able to make a dividend payment in December so holding the dividend payment till January will enable the cash flow positive and allows for December sales to be realized, therefore usable to maket he January final payment.
Conclusion
Hampton Machine Tool Company is not in a secure financial condition.There are many improvements needed to survive. For instance, in working capital’s quantity and quality, in profitability, in liquidity and for financial stability they should focus on new improvements. Again, the dividend payment should be delayed to January.
Recommendation
Since the company’s problems are mostly temporaray and the company past the analysis of credit, the Bank may grand both Hampton’s loan refinancing of the $1million loan to be paid on December 1979, end the additional $ 350,000 that Hampton wants to borrow (payable on January 31, 1980). However, its very much advisable for St. Louis National Bank to undertake further studies and collect more data such as industry ratios and data, prevailing interest rates, financial statements from prior years etc. to permit a better and more informed decision.
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