1.Why can't a profitable firm like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 contributed to this situation? A/ Hampton Machine Tool Company was unable to repay its loan on time due to several factors. One of such factors is the fact that the stock repurchase, for which the loan was initially requested, was a major cash disbursement of $3 million. In the period between November 1978 and August 1979, stock repurchase represented 58% of total expenditures for that period, while inventory purchases represented 42% of total expenditures.
There were some developments that also contributed to this situation. For instance: The shipment has been upset by the suppliers’ delay of sending the electronic control mechanisms to Hampton. This has influenced the decrease of cash from past months as for example the accumulated orders have not been filled. Raw materials were acquired before immediate need. The company has spent $420,000 for the purchase of this type of inventory. Since December 1978, Hampton has spent $3 million on repurchasing stocks of several dissident shareholders. The $181,000.00 tax payment in December.
The $150,000.00 dividend payment in December. We consider that this dividend payment must not be made.
2.Based on the information in the case, prepare a projected cash budget for the four months September through December 1979, a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979.
Pro Forma Income Statement, Balance Sheet, and Cash Budget for the period from September to December 1979 are found in attachment.
3.Review the results of your forecast. Doe the cash budgets and the pro forma financial statements yield the same results? Why?
Hampton Machinery Tool Company’s income statement shows a balance in retained earnings for December of $435,570.00. At...