Hampton Tool Machine Company

1. Why can`t a profitable company like Hampton repay its Bank Loan on time and why does it need more bank financing? 

The excising $1 million loan was due September 30, 1979, but Mr. Cowins requested to renew it until the end of 1979.   The main cause why Hampton can`t repay its Bank Loan on time is that the company made a stock repurchase, for which loan was taken. That was major cash expenditure for the company of $3 million ($1million of loan+ $2 million of excess cash) in December 1978; this was a main reason why company had a delay in repaying of the loan. 

The president of the company, Mr. Cowins wishes to borrow an additional $350,000 “for planned equipment purchases in October”, they didn`t buy or renew an equipment since the economic recession. He also mentioned this loan in total $1,350,000 will be repaid at the end of December 1979.   

  2. What major developments between November 1978 and August 1979 contributed to this situation? 

There were also developments that contributed to this situation. The company spent extra $420,000 on raw materials beyond company`s needs. Another one is that Hampton Company had a reduction in work because they were waiting for electronic control mechanisms to finish the orders. These developments lead to the decrease of Hampton`s cash in last months.

  4. Review the results of the forecast. Do the Cash budgets and the Pro Forma Financial statements give you the same results? Why?

During the four forecasted months (Table 1) we can see that for almost every month the outflows were larger than inflows. This gave us a negative ending cash balance at the end of December.   The Cash budget and Forma statements give us the same results because we use December Cash balance (-$331.5) as the plug in Balance sheet (-$331.5) to balance Assets and Liabilities. 

  5. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that...