Hampton Case Study

Wing Sum Vanessa Lee

October 8, 12

Cash Budgeting Case

Hampton Machine Tool Company

a) Hampton is a company that manufactures machine tools. Its suppliers are the

electronic control mechanism, raw materials and equipment. The customers are

major aircraft manufacturer and automobile manufacturers in St Louis area, such as

the General Aircraft Corporation. The competitive position of Hampton is that its

machine tool has the severe cyclical fluctuation characteristic where other

companies do not have.

b) Hampton repurchases its outstanding common stock because there are shareholders

who have different point of view as him, so that he has to buy back all the fraction

of those shareholders’ stocks. The impact on financial performances is that it will

increase the earnings per share of the stock.

c) Hampton could not repay the $1 million loan on time because it has $16,500,000

backlog of unfilled orders, and this amount is 90% of the annual capacity. The

shipment of order was late because it has to wait for the electronic control

mechanisms supplier to ship the electronic components to the Hampton factory.

Due to the late shipment of electronic components, there was a work in progress of

$1,320,000 in August 1979. It took another few weeks for Hampton to complete

the machines and ship them to the customers. Therefore, the payments from

customers are postponed. Although this company can make profit, it has to wait for

the machines to be available to be shipped. Therefore, Hampton cannot repay the

$1 million loan in September 1979.

Apart from that, since the company used the excess cash of $2 million plus the $1

million loan to repurchase the common stock on December 1978, the company did

not have extra cash at that moment. Therefore, the company needs to borrow

additional money for purchasing new equipment, so as to increase the company

liquidity and the also efficiency of machines tool production. This does not mean the

company is...