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Hampton Machine Tools Company Case

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Introduction

EXECUTIVE SUMMARY Hampton Machine Tools Company has recently requested its bank, the Saint Louis National Bank to allow the company to delay the principal payment of its outstanding $1M loan due on September 1979 to the end of the year. In addition to this, it is also requesting an additional $350,000 loan for the purchase of needed equipment by October. Using the financial statements and reports presented by the company, the bank assessed whether it is reasonable for them to grant the company's requests. Pro forma income statements and projected cash budgets for the remaining four months of the year were made and analysed for the evaluation. Since the bank found out with the given projections that the company will not be able to pay according to the original terms, the bank made some adjustments to determine the terms that would be more realizable. The bank then decided to grant the company the additional $350,000 loan due on January 1980 with the condition that it must pay the principal of its first loan on a monthly instalment until December. In addition to this, the company should also delay its dividend payment for a month to be able to prioritize the repayment of its debts. ...read more.

Middle

Selling&Admin Exp 138 143 139 243 662 Interest Expense 20 20 20 20 81 NI before tax 263 272 265 464 1264 Income Tax 126 131 127 223 606 Net Income 137 142 138 242 658 Dividends 0 0 0 150 150 Total year end Previous increase 14943 100.00% 7854 90.26% 10134 67.82% 5052 100.59% 4809 32.18% 2802 71.63% 1582 10.59% 1296 22.10% 201 1.35% 0 3020 20.21% 1506 100.55% 1448 9.69% 723 100.30% 1572 10.52% 783 100.77% 150 1.00% 50 200.00% Exhibit A.2. Hampton Tool Company Projected IS (using mid-year forecast with additional 350,000 loan and extension) September October November December Total (4 months) Net Sales 2163 1505 1604 2265 7537 Cost of Sales 1467 1021 1088 1536 5111 Gross Profit 696 484 516 729 2426 Selling&Admin Exp 229 159 170 240 798 Interest Expense 20 20 20 20 81 NI before tax 437 304 324 458 1523 Income Tax 210 146 155 220 730 Net Income 228 158 169 238 793 Dividends 0 0 0 150 150 Total year end Previous increase 16225 100.00% 7854 106.58% 11003 67.82% 5052 117.80% 5222 32.18% 2802 86.35% 1718 10.59% 1296 32.57% 201 1.24% 0 3279 20.21% 1506 117.75% 1572 9.69% 723 117.49% 1707 10.52% 783 118.00% 150 0.92% 50 200.00% Exhibit B.1. ...read more.

Conclusion

Louis National Bank should renew the P1 million loan of Hampton Machine Tools Company and give them the P350,000 additional loan, however the terms should be adjusted. JUSTIFICATION After studying Hampton's Cash flows, it may not be able to repay in full the additional loan come end of year. But still, St. Louis National Bank could give an extension for the additional loan that Hampton company is requesting. Aside from this, the bank could give at least up to January for Hampton company to pay the remaining amount of the 1st loan and the additional loan. Taking into consideration that Hampton company will pay a part of the principal starting September of 1979 to reduce interest expense and that the interest will be paid at the end of the month. The company's cash flows show that if given an extension for the additional loan to be paid in January, it could repay the 1st loan completely in December, pay the additional loan and it could still declare dividends on January. The extension up to the 1st month of following year will benefit Hampton Company so much because it could repay its loans, declare dividends and also have excess cash balance. IMPLEMENTATION St. Louis National Bank should renew the P1 million loan of Hampton Machine Tools Company and give them the additional loan to be paid on January instead of December. ?? ?? ?? ?? Case 4: Hampton Machine Tools Company ...read more.

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