CASE ANALYSIS: HAMPTON MACHINE TOOLS COMPANYGROUP 6. RAMOS.RODRIGUEZ.SHUKLA.SIBAL.TANTENGCO.TIA.

Company BackgroundFounded in 1915 Defence and Automobile Machine Tool ManufacturerRecord Breaking Profits in 1960-1970Experienced slowdown after mid-1970sNo debt for the past ten years

Balance Sheet

Balance Sheets, 1978--1979 (thousands of dollars)19781979Nov.Dec.Mar.JuneJulyAug.Cash$2,520 $491 $505 $1,152 $1,678 $1,559 Accounts receivable, net$1,245 $1,863 $1,971 $1,893 $1,269 $684 Inventories$2,601 $2,478 $3,474 $3,276 $3,624 $4,764 Current assets$6,366 $4,832 $5,950 $6,321 $6,571 $7,007 Gross fixed assets$4,010 $4,010 $4,010 $4,010 $4,010 $4,010 Accumulated depreciation$2,998 $3,010 $3,040 $3,070 $3,080 $3,090 Net fixed assets$1,012 $1,000 $970 $940 $930 $920 Prepaid expenses$62 $40 $39 $24 $24 $42 Total assets$7,440 $5,872 $6,959 $7,285 $7,525 $7,969

Notes payable, bank$0 $1,000 $1,000 $1,000 $1,000 $1,000 Accounts payable$348 $371 $681 $399 $621 $948 Accruals$561 $777 $849 $678 $585 $552 Taxes payable*$150 $74 $373 $354 $407 $479 Customer advances$840 $1,040 $1,040 $1,566 $1,566 $1,566 Current liabilities$1,899 $3,262 $3,943 $3,997 $4,179 $4,545 Common stock ($10 par value)$1,178 $428 $428 $428 $428 $428 Surplus$4,363 $2,182 $2,588 $2,860 $2,918 $2,996 Net worth$5,541 $2,610 $3,016 $3,288 $3,346 $3,424 Total liabilities and net worth$7,440 $5,872 $6,959 $7,285 $7,525 $7,969 *Tax payments in 1979 include $75,000 due March 15 on underpayment of 1978 taxes and four equalpayments of $181,000 due on the 15th of April, June, September, and December for estimated 1979 taxliability with any underpayment of 1979 taxes due March 15, 1980.

Income Statement

Income Statements, 1978--1979 (thousands of dollars)FiscalEightYearMonthsEndingDec.1979Ending31/12/781978Jan.Feb.Mar.Apr.MayJuneJulyAug.31/8/79Net sales$7,854 $1,551 $861 $672 $1,866 $1,566 $873 $1,620 $723 $507 $8,688 Cost of sales*$5,052 $1,122 $474 $369 $1,362 $1,137 $567 $1,197 $510 $276 $5,892 Gross profit$2,802 $429 $387 $303 $504 $429 $306 $423 $213 $231 $2,796 Selling and admin expenses$1,296 $248 $103 $61 $205 $172 $96 $130 $87 $66 $920 Interest expense$0 $0 $15 $15 $15 $15 $15 $15 $15 $15 $120 Net income before taxes$1,506 $181 $269 $227 $284 $242 $195 $278 $111 $150 $1,756 Income taxes$723 $87 $129 $109 $136 $116 $94 $133 $53 $72 $842 Net income$783 $94 $140 $118 $148 $126 $101 $145 $58 $78 $914 $0 Dividends$50 $25 $0 $0 $0 $0 $0 $100 $0 $0 $100 * Includes depreciation charges of $150,000 in 1978, $12,000 in December 1987, and $10,000 per month in 1979.

Shipments

Shipments at Selling Price (thousands of dollars)As ForecastAs ForecastDec. 1978ActualSept. 19791979January$1,302 $861 February$1,872 $672 March$1,635 $1,866 April$1,053 $1,566 May$1,293 $873 June$1,479 $1,620 July$1,488 $723 August$1,797 $507 Eight months total$11,919 $8,688 September$1,299 $2,163 October$1,347 $1,505 November$1,311 $1,604 December$2,298 $2,265

Problem AreaNo sufficient cash to pay for the loan plus need financing for a new equipment

Renewal of $1 million loan

Additional $350,000 loan for equipment purchase

$ 1 million loan and $350,000 plus monthly interest will be paid at the end of December 1979

Movements in receivables, payables, dividends with impact on cash flows

Extending Credit Term & $350,000 additional loanSource: Investopedia.com

ADVANTAGESDISADVANTAGES Debt Restructuring (Companies use debt restructuring to avoid default on existing debt) VS Default Risk (The event in which companies or individuals will be unable to make the required payments on their debt obligations) Opportunity cost (The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.)

Extending Credit Term & $350,000 additional loan

ADVANTAGESDISADVANTAGESDebt : Used for financing (purchase back stocks) and investing (purchase of new equipment); long-term benefits for the company Liquidity risk (Hampton) The ability to convert an asset to cash quickly

Assessing Hampton End of Year

FORECAST BALANCE SHEETSeptOctNovDecCash6991007766-332AR 1,323 779 1,604 2,265 Inventories 3,339 3,234 3,129 3,024 Current Assets5361502054994957Gross Fixed Assets4010436043604360Accumulated Depreciation 3,100 3,110 3,124 3,137 Net Fixed Assets 910 1,250 1,236 1,223 Prepaid Expenses42424242Total Assets 6,313 6,312 6,777 6,222

Notes Payable, bank 1,000 1,350 1,350 - Accounts Payable 600 600 600 600 Accruals 552 552 552 552 Taxes Payable 160 305 528 888 Customer Advance Payments 726 - - - Current Liabilities 3,038 2,807 3,030 2,040 Common Stock428428428428Surplus 2,847 3,077 3,319 3,754 Net worth 3,275 3,505 3,747 4,182 Total Liabilities & Net Worth 6,313 6,312 6,777 6,222

Assessing Hampton End of Year

FORECAST INCOME STATEMENTSeptOctNovDecSales 2,163 1,505 1,604 2,265 Purchases 600 600 600 600 WIP Inventory Reduction 1,320 - - - Raw Materials Reduction 105 105 105 105 Cost of Sales 2,025 705 705 705 Gross Profit 138 800 899 1,560 Depreciation 10 10 14 14 Other expenses 400 400 400 400 Income Before Interest & Taxes (272) 390 485 1,146 Interest Expense 15 15 20 20 Income Before Taxes (287) 375 465 1,126 Income Taxes (138) 145 223 541 Net Income (149) 230 242 586

Dividends - - - 150

Weighing OptionsLong-Term Customer Relationship look at past activity on the account. Check the balances to tell how liquid the potential borrower is & what time of year the borrower has strong need of cashCollateral & Compensating Balance A firm receiving a loan must keep a required minimum amount of funds in a checking account at the bank. It can be taken by the bank to make u losses on loan if borrower defaults. If the bank extends credit term to Hampton, it can give a condition of increasing the interest rate, a rate higher than 1 %. Other options: credit insurance, credit derivative, netting agreements

Source: The Economics of Money, Banking & Financial Markets, Mishkin, Frederic S.

Conclusion

Hampton wont be able to pay the loan in December. Extend the forecast.

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