Questions in English

Hampton Machine Tool Company

A bank lending officer must decide whether to extend and increase a loan to a small machine tool company. Case pro
Other issues that can be addressed include the impact of stock repurchase, dividends, advanced payments by custome

1. Why can't a profitable firm like Hampton repay its loan on time and why does it need more additional bank finan

2. Based on the information in the case, prepare a projected cash budget for the four months September through D

3. Based on the information in the case, prepare a projected income statement for the same period, and a pro forma

4. Review the result of your forecast. Do the cash budgets and the pro forma financial statements yield the same re

5. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your resu
2. part. Each question 10 marks

6. What action should Mr. Eckwood take on Mr. Cowins' loan request? What are the major risks associated with th

7. Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of thi

8. Critically asses Hampton's dividend policy. Do you agree with Mr. Cowins' proposal to pay a substantial divide

Page 1

Questions in English

ine tool company. Case provides sufficient data for preparation of cash budgets and pro forma financial statements in order to an
anced payments by customers, as well as general sensitivity analysis.

more additional bank financing? What major developments between November 1978 and August 1979 contributed to this situa

onths September through December 1979. (ST-2)

me period, and a pro forma balance sheet as of December 31, 1979 (ST-3,4)

tatements yield the same result? Why?

pments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?

ajor risks associated with the proposed loan? What other alternatives does Mr. Eckwood have, and what are their pros and cons?

? What is the impact of this repurchase on Hampton's financial performance?

l to pay a substantial dividend in December?

Page 2

Questions in English

ncial statements in order to analyze the lending officer's problem.

1979 contributed to this situation? (ST-1)

in December?

what are their pros and cons? What would you do?

Page 3

Exhibit 1
Exhibit 1

Shipments at Selling Price (thousands of dollars)

As Forecast
December
1978

1979

January
February
March
April
May
June
July
August

Eight months total

As Forecast
Actual September 1979

$1,302
1,872
1,635
1,053
1,293
1,479
1,488
1,797

$861
672
1,866
1,566
873
1,620
723
507

$11,919

$8,688

September
October
November
December

$1,299
1,347
1,311
2,298

Page 4

$2,163
1,505
1,604
2,265

Exhibit 2
Exhibit 2

Balance Sheets, 1978-1979 (thousands of dollars)

1978

1979

November

December

March

June

July

$2,520
1,245
2,601

$491
1,863
2,478

$505
1,971
3,474

$1,152
1,893
3,276

$1,678
1,269
3,624

Current assets

6,366

4,842

5,950

6,321

6,571

Gross fixed assets

4,010

4,010

4,010

4,010

4,010

2,998

3,010

3,040

3,070

3,080

1,012
62

1,000
40

970
39

940
24

930
24

$7,440

$5,872

$6,959

$7,285

$7,525

-$348
561

$1,000
371
777

$1,000
681
849

$1,000
399
678

$1,000
621
585

150
840

74
1,040

373
1,040

354
1,566

407
1,566

1,899

3,262

3,943

3,997

4,179

1,178
4,363

428
2,182

428
2,588

428
2,860

428
2,918

5,541

2,610

3,016

3,288

3,346

$7,440

$5,872

$6,959

$7,285

$7,525

Cash
Accounts receivable, net
Inventories

Accumulated depreciation
Net fixed assets
Prepaid expenses
Total assets
Notes payable, bank
Accounts payable
Accruals
Taxes payablea
Customer advance payments
Current liabilities
Common stock ($10 par value)
Surplus
Net worth
Total liabilities and net worth

Tax payments in 1979 included $75,000 due March 15 on underpayment of 1978 taxes and four equal payments
of $181,000 due on the fifteenth of April, June, September, and December for estimated 1979 tax liability with
any underpayment of 1979 taxes due March 15, 1980.
a

Page 5

Exhibit 2

1979
August
$1,559
684
4,764
7,007
4,010
3,090
920
42
$7,969
$1,000
948
552
479
1,566
4,545
428
2,996
3,424
$7,969

equal payments
x liability with

Page 6

Exhibit 3
Exhibit 3

Income Statements, 1978-1979 (thousands of dollars)

Fiscal
Year Ending
12/31/1978

December
1978

$7,854

$1,551

$861

$672

5,052

1,122

474

369

1,362

1,137

567

2,802

429

387

303

504

429

1,296

248

103

61

205

--

--

15

15

Net income before taxe

Income taxes

1,506
723

181
87

269
129

227
109

Net income

$783

$94

$50

$25

Net sales
Cost of sales

Gross profit
Selling and
administrative
expenses
Interest expense

Dividends

January February

$140

$118

--

--

March

1979
April May

June

$1,866 $1,566 $873 $1,620

July August
$723

$507

$8,668

1,197

510

276

5,892

306

423

213

231

2,796

172

96

130

87

66

920

15

15

15

15

15

15

120

284
136

242
116

195
94

278
133

111
53

150
72

1,756
842

$148
--

$126 $101
--

--

$145
$100

Includes depreciation charges of $150,000 in 1978, $12,000 in December 1978, and $10,000 per month in 1979.

Page 7

Eight
Months
Ending
8/31/1979

$58
--

$78
--

$914
$100

Exhibit SN-1-2 A Statement of Cash Flow November 30, 1978 - August 31, 1979 (thousands of doll

Cash Flows and Operating Activities

Net income (December 1978 + Eight Months Ending 31/8/1979)
Decrease in receivables
Decrease in prepaid expenses
Increase in accounts payable
Increase in tax payable
Increase in customer advances
Decrease in accruals
Increase in inventories
Net cash provided (used) by operating activities
Cash flow form Investing Activities
Net decrease in property, plant and equipment (a)
Net cash used for investing activities
Cash Flows from Financing Activities
Proceeds from bank loan
Cash paid for dividends
Cash paid for stock repurchased
Net cash provided by financing activities
Net increase (decrease) in cash during period
Cash at beginning of period
Cash at end of period

August 31, 1979

1, 1979 (thousands of dollars)

Exhibit SN-2 Projected Cash Budget, September 1979 through January 1980 (thousand of dollars)
September October

November

Receipts
Collections of receivables (a)
Bank loan
Total cash inflow

(b)

Expenditures
Payments of accounts payables (d)
Other operating outlays (e)
Capital expenditures
Tax payments (f)
Interest payments - bank loan
Principal payments - bank loans
Dividends
Total cash outflow
Beginning cash balance
Net monthly cash flow
Ending cash balance
Note: Other assumptions stated in the case
(a) Assumes a 30-day collection period.
(b) $2163 minus $840 advance
( c ) $1505 minus $726 rest of advance of General Aircraft Corporation
( d ) Assumes a 30-day payable period
(e) Assumes $400 per month
(f) See note (a) in Ex. 2 and Ex. 4

(c)

ary 1980 (thousand of dollars)

December January

Exhibit SN-3 Pro Forma Income Statement, September 1979 through December 1979 (thousand of
Sales
Cost of sales and other expenses
Profit before taxes (EBT)
Taxes
Profit after taxes
Dividends
Addition to retained earnings

(a) Since prepaid expenses and accrued expenses are assumed to be uncharged, other expenses are equal to o
Therefore,
Total costs = Cost of Sales + Other Expenditures, or

Total costs = Reduction in WIP inventories+Reduction in raw materials inventories + Four months' purchases +

(b) Depreciation of new machine : $350 straight-line for eight years = $43.75 or 3.65 per month
Depreciation for September - December = Four months on old equipment plus two months on new equipment

Statement, September 1979 through December 1979 (thousand of dollars)

Projected sales for September, October, November,
December
See note (a)

48% of profit before taxes minus $35 investment tax credit

Proposed December dividend

ued expenses are assumed to be uncharged, other expenses are equal to other expenditures

Expenditures, or

tories+Reduction in raw materials inventories + Four months' purchases + Depreciation (b)+ Four months' other outlays +

350 straight-line for eight years = $43.75 or 3.65 per month

mber = Four months on old equipment plus two months on new equipment

r months' other outlays + Four months' interest

Exhibit SN-4 Pro Forma Balance Sheet, December 31, 1979 (thousand of dollars)
Cash
Account receivable
Inventories
Current assets
Gross fixed assets
Accumulated depreciation
Net fixed assets
Prepaid expenses
Total assets
Account payable
Accruals
Taxes payable
Current liabilities
Net worth
Total liabilities and new worth

ce Sheet, December 31, 1979 (thousand of dollars)

Plug, reconciliation with cash budget
December's sales
$4765 minus $ 1320 reduction in work-in-progress minus $ 420 in raw materials

$ 4010 + $______ ?capital expenditures

Unchanged from August 31, 1979

December's purchases
Unchanged from August 31, 1979
$ 479 minus $___? tax payments + $ ____? liability September through December

$ 3424 + $____? retained earnings September through December

Exhibit SN-1 Sources and Uses of Funds, November 30, 1978 - August 13, 1979 (thousands of dolla
Sources
Increase in bank debt
Increase in retained earnings
Decrease in cash
Increase in customer advances
Increase in account payable
Decrease in account receivable
Increase in taxes payable
Decrease in net fixed assets
Decrease in prepaid expenses
Total sources
Uses
Stock repurchase
Increase in inventories
Decrease in accruals
Total uses

1979 (thousands of dollars)