Hampton Machine Tool Company, a machine tool manufacturer, was founded in 1915. Hampton's customer base is made up primarily of military aircraft manufactures and automobile manufactures in the St. Louis area. Hampton felt the boom in the 1960s with record setting profits in the mid to late 1960s. Hampton slowed down in the 1970s with the withdrawal from Vietnam War and the oil embargo. Hampton stabilized by the late 1970s and now has a larger market share as other competitors were unable to make it through the tough times.
It is now September 14, 1979 Hampton has asked for an extension to the end December 1979 on the $1 million loan they took out from the St. Louis National Bank at the end of December 1978. The loan was originally taken out on the terms of monthly interest payment at a rate of 1.5% with the principle to be paid back at the end of September 1979. Hampton also has asked for an additional $350,000 loan to also be repaid at the end of December 1979 with interest payments monthly at the rate of 1.5%. The additional loan is a must for Hampton to update its machinery which they have not done since the economy went into a recession. The problem currently facing Hampton Machine Tool Company is the ability to payback it's current loan and the additionally requested loan from the St. Louis National Bank. If Hampton carries forward as planned they will be short $331,500.(Exhibit 1) Ways to fix the current problem are to not pay dividends; this will save $150,000 but still leave them at a shortage of $181,500. Payment of dividends would be a nice gesture to stockholders that have stood by them, but may be at too great of cost. Stockholders do not want to see the stock ultimately become valueless. They would rather forgo dividends now if it means their stock will still have value and they may receive dividends in the future. Not paying the dividends is the number one thing Hampton must remove from their current cash budget plan. They can start to repay some of the principle as soon as possible to reduce the interest payments. This will help reduce the amount of interest paid in total (Exhibit 2). While this solution does not eliminate the problem of still being unable to repay the full loan, they are able to lessen their cash shortage. The assumptions I used for this budget was that approximately $500,000 on hand is all they will need from month to month. I also assumed the $500,000 on hand is not earning interest which would also help generate cash which would help in repayment. The ending cash on hand for October is $710,000 to help cover for November which has a larger amount of cash outflows then cash inflows. This on it's own would bring their cash shortage to $319,500 a savings of $12,000. Still this along with the removal of the $150,000 in dividends will still not eliminate their cash shortage. With the two combined, they still will have a shortage of $169,500. (Exhibit 3) They can extend the repayment to the future when it will be possible for them to be repaid. I have worked a cash budget out into January of 1980 when they will be able to collect the cash from the large number of orders they expect to finish in December. I made the assumption that the proceeds from a sale would not be collected until next month since their sales terms are net 30 and most companies would wait the full thirty days to pay Hampton. Assuming all other cost remain the same they will be able to repay both loans in full, make a $200,000 dividend payment and still have $885,500 cash on hand.(Exhibit 4) This is using the assumption that they started to repay the loans ahead of time and did not pay the dividends. They can look for an advance from one or many of their current customers to help cover the shortfall. This may cause consumers to loose confidence in Hampton and hurt their chance of repeat business. There is also no grantee that customers will provide the advances. They should have their current cash...
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