Hampton Machine Tool Company

Hampton Machine Tool Company

Hampton is a company that was established in 1915. Its major customers are automobile and aircraft manufacturers in St. Louis area. It operated successfully in 1960s during the Vietnam War. The company greatly benefit from this war through the sale of the products that they had. In the early 1970s the war ended, the operations and profitability of the company declined. It experienced severe reduction in sale of it productions.

The company through its manager had to revolutionize its strategies in order to fund the company. It borrowed loan from St. Louis National Bank at the end of 1978. The money was used to repurchase the stock of several dissident shareholders. The proceeds of the loan and the excess cash in the bank were used to repurchase 75,000 shares, which would cost $3million. The loan was to be paid in a period of eighteen months at 1.5 interests monthly. Until December 1978, Hampton Tools had maintained a capital structure of zero debt.

Now, the company hopes to renewal the $1 million loan originally due to be repaid on September 30, and also requesting an additional loan of $35,000 for planned equipment purchases in October 1979. The vice president of the St. Louis National Bank has to decide whether or not to grant a loan renewal request by Hampton Machine Tool Company.

Question 1

The Hampton can't repay its Bank Loan on time and need more bank financing; one reason is that the company used the $3 million loan plus its $2 million excess cash to repurchasing 75,000 of stocks from its several dissident shareholders since December 1978. In addition, according to the company's sales shipment had been upset due to the supplier's delay in 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.

Question 2

Question 3

Cash Budget (from September 1979 to December 1979)

September October November December

Collection of receivables $684 $1323 $779 $1,604

Bank Loan 350

Total cash receipts 684 1673 779 1604

Disbursements

Payment of accounts payables 948 6009 600 600

Other operating outlays 400 400 400 400

Tax payments 182 181

Interest payments-bank loan 15 15 20 20

Principal payments-bank loan 1350

Dividend