Hampton Case study
Līga Brūmane
Liene Ratniece-Miltiņa
Sandeep Menon
MIF 1st year
Hampton machine tool company case study
1. Why can't a profitable firm like Hampton repay its loan on time and why does it need more additional bank financing? What major developments between November 1978 and August 1979 contributed to this situation? (ST-1)
Hampton has a substantial backlog of outstanding orders from respected customers so they need cash to purchase equipment to maintain production efficiency. In an effort to conserve cash, very little has been spent on equipment in 1978 and 1979, resulting in poor ability to maintain production at a capacity rate. Also, Hampton had to wait for their suppliers to ship electronic control mechanisms, upsetting the shipment schedule.
2. Review the result of your forecast. Do the cash budgets and the pro forma financial statements yield the same result? Why?
The cash budgets and statement of sources and uses yield negative results concerning the principal payment of the loan for December, based on Mr. Cowins’ plan. This analysis is based on projected sales, dividend payments and tax payments. Consequently, the sales projects and accounts receivables are 30 days net; if not paid on time, then this could change the results significantly by putting the company in more of a financial bind. Based on our forecasts it seems that Mr. Cowins is incorrect about being able to repay the loan in December, but Hampton should be able to repay in January with more precise planning.
3. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?
It is obvious that Hampton cannot afford to repay the loan in December, if they proceed with their original plans. The company will have a negative cash flow in December. They should request a one-month extension on the loan, as they cannot afford to make a loan payment in December.
Liene Ratniece-Miltiņa
Sandeep Menon
MIF 1st year
Hampton machine tool company case study
1. Why can't a profitable firm like Hampton repay its loan on time and why does it need more additional bank financing? What major developments between November 1978 and August 1979 contributed to this situation? (ST-1)
Hampton has a substantial backlog of outstanding orders from respected customers so they need cash to purchase equipment to maintain production efficiency. In an effort to conserve cash, very little has been spent on equipment in 1978 and 1979, resulting in poor ability to maintain production at a capacity rate. Also, Hampton had to wait for their suppliers to ship electronic control mechanisms, upsetting the shipment schedule.
2. Review the result of your forecast. Do the cash budgets and the pro forma financial statements yield the same result? Why?
The cash budgets and statement of sources and uses yield negative results concerning the principal payment of the loan for December, based on Mr. Cowins’ plan. This analysis is based on projected sales, dividend payments and tax payments. Consequently, the sales projects and accounts receivables are 30 days net; if not paid on time, then this could change the results significantly by putting the company in more of a financial bind. Based on our forecasts it seems that Mr. Cowins is incorrect about being able to repay the loan in December, but Hampton should be able to repay in January with more precise planning.
3. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?
It is obvious that Hampton cannot afford to repay the loan in December, if they proceed with their original plans. The company will have a negative cash flow in December. They should request a one-month extension on the loan, as they cannot afford to make a loan payment in December.