Hampton Machine Tool Company Essay

nearly The CompanyHampton form Tool was established in 1915 and has been manufacturing machine tools since its foundation. Hampton follows customer base is made up primarily of aircraft manufacturers and railcar manufactures in the St. Louis area. It experienced record production and profitableness during the years. Sales and profitability declined in the mid-1970s with the withdrawal from Vietnam War and the oil embargo. However, the company had stabilized the extensive of sales by the late 1970s. The reasons of Hamptons recoery were the increase government issue of military aircraft sales in twain export and domestic markets, the machine industry rising and an improvement in the economy.Summary of The ProblemHampton Machine Tool Company concur problems with the re brookment of its $1million loan due era of September 1979. The loan was used for the crease repurchase. Thanks to the president of Hampton Company- , Mr.Cowins good reputation and the credibility in the busine ss community and obligingness of projected sales and forecasted financial statements St.Louis National Bank gave the loan to the company. in that respect were several factors caused the failure of forecast sales including firstly, the detention of delivery by the major component supplier on time, secondly, the purchase of $420,000 worth of components over normal level of inventory, thirdly, problems of machines occured during the production period. On the other top, the company plans to pay a dividend of $150,000 in 1979. Therefore, Hampton needs an additional loan of $350,000 till October to be paid on celestial latitude 1979 along with the initial loan outlineThe bank should make decision by the end of the October due to the matureness date of the initial loan. To assess the borrowers ability for the fallment Pro-forma pecuniary Statements, Profitability ratios, Liquidity and leverage ratios, and projected change budget should be assessed.Projected Cash Budgets and Proform a Financial Statements yield negative results about the header defrayment of the loan for celestial latitude 1979. Theforecasts of this analysis are based on projected sales, one month extension of the loan and dividend payment, and starting to repay the loan early.Projected SalesIf sales projections and accounts receivables are non met, this station willing be worse than the present one financially. But as we can see in the projected cash in budget, ending cash balance in December is negative so that Hampton will be unable to repay the loan on that time. On the other hand repayment in January will be possible with more finished planning.Liquidity RatiosThe reason of the paradox of increase current ratio and internet working capital but decreasing quick ratio is the increasing level of inventories Activity RatiosThe average age of inventory improved as a result of an increase in inventories. The company has a stock of row materials, and there are additional inventories waiti ng for the production mathematical operation. The receviables worry seemed to improve but collection in July and August needs a concern and a further study should be undertaken.Profitability RatiosAlthough there is unstable trend, Hampton Companys profit ratios seems as its best apparent to the companys increase on its Net Profit boundary line both in history and projection.Dividend PaymentThe company repurchased a meaty fraction of its outstanding common stock. Despite the good purposes about increasing the stock value, they had to make a loan of $1 million for he purchase. Because of the unreasonable conditions to pay dividends in December, the company will have a negative cash flow.SolutionWe inferred from the financial statements that the company can non afford to repay the loan in December, otherwise they will have negative cash flow. However, all the financial statements have consistency among them coverthis declining trend. They should offer a one month extention on th e loan to propose a reasonable solution and then should start repaying it early.The repayment process should be startedPayment of $200,000 in SeptemberPayment of $100,000 in OctoberNo payment in NovemberPayment of $350,000 in DecemberThese payments reduce the arouse and final loan payment.Another solution is about the extention of one month till January with the final repayment of $700,000 once December accounts receivables are collected. Hampton will not able to make a dividend payment in December so holding the dividend payment till January will enable the cash flow positive and allows for December sales to be realized, therefore practicable to maket he January final payment.ConclusionHampton Machine Tool Company is not in a secure financial condition.There are many improvements take to survive. For instance, in working capitals quantity and quality, in profitability, in liquidity and for financial stability they should focus on new improvements. Again, the dividend payment sh ould be delayed to January.RecommendationSince the companys problems are largely temporaray and the company past the analysis of credit, the Bank may grand both Hamptons loan refinancing of the $1million loan to be paid on December 1979, end the additional $ 350,000 that Hampton wants to borrow (payable on January 31, 1980). However, its very much advisable for St. Louis National Bank to undertake further studies and collect more info such as industry ratios and data, prevailing interest rates, financial statements from preceding years etc. to permit a better and more certain decision.