Hampton Machine Tool Company Essay

About The CompanyHampton Machine Tool was established in 1915 and has been manufacturing machine tools since its foundation. Hampton unions customer base is made up primarily of aircraft manufacturers and railway car manufactures in the St. Louis area. It experienced record production and profitability during the years. Sales and profitability declined in the mid-1970s with the withdrawal from Vietnam War and the oil embargo. However, the company had change the massive of gross sales by the late 1970s. The reasons of Hamptons recovery were the increasing number of military aircraft sales in both export and domestic markets, the automobile industry rising and an improvement in the economy.Summary of The ProblemHampton Machine Tool Company have problems with the re cave inment of its $1million loan due date of folk 1979. The loan was used for the stock repurchase. Thanks to the president of Hampton Company- , Mr.Cowins good reputation and the credibility in the business community and submission of projected sales and forecasted financial statements St.Louis National Bank gave the loan to the company. There were several factors caused the failure of forecast sales including firstly, the detention of delivery by the major comp unmatchednt supplier on time, secondly, the purchase of $420,000 worth of components over normal level of inventory, thirdly, problems of machines occured during the production period. On the other hand, the company plans to pay a divid peculiarity of $150,000 in 1979. Therefore, Hampton ask an superfluous loan of $350,000 till October to be paid on declination 1979 along with the initial loan AnalysisThe bank should make decision by the end of the October due to the maturity date of the initial loan. To assess the borrowers ability for the repayment Pro-forma Financial Statements, Profitability ratios, Liquidity and leverage ratios, and projected cash budget should be assessed.Projected Cash Budgets and Proforma Financial Statements yield negative results about the principal payment of the loan for December 1979. Theforecasts of this analysis are based on projected sales, one month extension of the loan and dividend payment, and starting to repay the loan early.Projected SalesIf sales projections and accounts receivables are not met, this situation go away 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 volition be unable to repay the loan on that time. On the other hand repayment in January will be possible with more accurate planning.Liquidity RatiosThe reason of the paradox of increasing current ratio and net working(a) capital but change magnitude quick ratio is the increasing level of inventories Activity RatiosThe 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 pro cess. The receviables management seemed to improve but gain vigorion in July and August needs a concern and a further study should be undertaken.Profitability RatiosAlthough there is unstable trend, Hampton Companys profit ratios seems as its best transparent to the companys increase on its Net Profit Margin both in history and projection.Dividend salaryThe company repurchased a substantial section 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.SolutionWe 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 showingthis declining trend. They should offer a one month extention on the loan to indicate a reasonable s olution and then should start repaying it early.The repayment process should be startedPayment of $200,000 in SeptemberPayment of $100,000 in OctoberNo payment in NovemberPayment of $350,000 in DecemberThese 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.ConclusionHampton Machine Tool Company is not in a secure financial condition.There are many improvements needed to survive. For instance, in working capitals 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. passSince the companys problems are mostly temporaray and the company past the analysis of credit, the Bank may grand both Hamptons 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.