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Copy of Hampton Machine Tool Company

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by

Joe Talampas

on 22 October 2013

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Transcript of Copy of Hampton Machine Tool Company

Hampton Machine Tool Company
Background
Operations started in 1915;
Manufactures machine tools;
Caters to the military aircraft manufacturers and automobile manufacturers within the St. Louis vicinity;
Company’s highs and lows: affected by decrease and increase of production brought by multiple economic factors
In December 1978, the President of HMTC, Benjamin Cowins, requested St. Louis National Bank for a loan of $1M to purchase stocks of dissident stockholders.
Terms of loan:
Interest: 1.5% to be paid monthly
Principal: to be paid on September 1979
Mr. Jerry Eckwood, Vice President of St. Louis National Bank, granted the loan for the ff. reasons:
HMTC’s submission of projected sales and forecasted FS
HMTC’s credibility as a depositor of the Bank
Mr. Cowin’s good reputation and credibility in the business community
In September 1979, HMTC requested for an extension of payment of the initial loan to Dec. 1979; and
An additional loan of $350,000.
Needed at the end of October
Interest: 1.5% to be paid monthly
Principal: to be paid on December 1979, along with the initial loan.
HMTC has no existing debt for the past 10 years on its balance sheet prior to the said loan
Problem definition
Should Mr. Eckwood ACCEPT or REJECT Mr. Cowin’s request of payment extension on the original loan, as well as the request for an additional loan of $350,000?

1915
1960
1970
Dec. 1978
Sep. 1979
Start of
operations
Experienced highs and lows in operations which is due to increase/decrease in production

Factors:
Vietnam war, economic conditions, expansion of export market.

With its conservative financial policies, HMTC was able to recover from its setback.

Initial loan of $1M to purchase stocks of dissident stockholders.

Requested for an extension of initial loan; and an additional loan of $350,000

Analysis
Analysis on the point of view of the creditor
Decision should be made by the end of the October, upon maturity date of the existing loan.
Assessment of the borrower’s ability to repay the loan upon maturity date:
Pro-forma Financial Statements
Cash Budgets
Profitability ratios
Liqiudity and leverage ratios
Projected Cash Budget
The following assumptions were used in preparing the cash budget:
All outstanding balance in the prior year’s accounts receivable will be collected net 30 days credit terms.
Purchases are settled net 30 days credit terms
Taxes amounting to P180,000 are paid on September and December
Unless otherwise stated, other operating expenses shall remain constant for the subsequent months
Projected Cash Budget
As seen in the projected cash budget, ending cash balances remain positive for the relevant periods.
The purchase of the machine was able to benefit the Company as it improved its ending cash balances for the month of October and November.
However, payment of the $1,350,000 loan would yield an unfavorable results in the December’s ending cash balance (i.e. -$331,000).
This signifies that the Company wouldn’t be able to settle such debt on time.
Projected Cash Budget
Settling the loan in January would be more beneficial to the HMTC as this would still yield positive cash flows
Pro-forma Balance Sheet
As provided by Mr. Cowins in his request letter, the following assumptions were used in preparing the Pro-forma Balance Sheet
Pro-forma Income Statement
The following assumptions were used in preparing the Pro-forma Income statement
Profitability Ratios
Though with a fickle trend, HMTC’ profit ratio proved to be at its best visible to the company’s increase on its Net profit margin both in history and in projection
The WIP Inventory reduction of $1320 in September caused a major set back on the said month which lead to the company to operate at a loss
Operating Efficiency
Clearly, there are two things that can be realized on the diagram above 1) that HMTC highly operates on cash or 2) its AR collection is highly efficient. HMTC over time was able to properly assess its imparted credit and collection
Conclusion
HMTC is not in a very secure financial position. Improvements in every area of the company are needed if the company is, in the first instance, to survive and then grow. The key areas of reform are the liquidity of the company and the quantity and quality of working capital, profitability, and financial stability. Management must address the issued issues, should they pursue adding a new loan. At present, HMTC cannot facilitate repayment with an add on interest rate even until December.
Recommendation
HMTC may want to restructure its loan that involves settling the debt through instalment basis, rather than lump sum method. Even though St. Louis bank may impose higher interest rate, HMTC would be able to manage their cash flows better by deferring significant amount of disbursement in only a month.

Further, HMTC may want to reassess declaring its dividends due to its unstable cash flows. On this note, analysis of its cost and benefit should be performed in order to avoid damaging its relationship with the stockholders.
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