Hampton Machine Tool Company

a. What is Hamptons competitive position in the market place? Who are their
suppliers? Who are the customers?

After a variety of economic factors throughout the 1970s caused huge declines in
the machine tool industry, including massive reductions in defense spending and
declines in automobile production, Hampton survived the downtown cycles and
captured an increased market share. Competitors were forced out of the industry,
automobile sales stabilized and military aircraft sales increased considerably. Their
competitive advantages include long-standing relationships with customers in the
automobile and aircraft industries, a strong debt position with no previous
outstanding debt, and relatively high cash positions throughout 1978 and1979.

Their suppliers are machine part manufacturers and producers of scarcer raw
material components.

Customers include military aircraft manufacturers and automobile manufacturers in
the St. Louis area.

b. Why did Hampton repurchase a substantial fraction of its outstanding common
stock? What is the impact of this repurchase on Hampton's financial performance?

Hampton repurchased the stock of several dissident shareholders to gain more
control over the company. It is unclear why these shareholders were dissident,
though it raises red flags as the shareholders could have insight into current
company policies or future earnings uncertainties. Hampton repurchased the shares
to quell these shareholders and maintain stricter control. This repurchase will raise
the stock price, and shows that Hampton has trust in the ongoing future of the
company.

c. Why can't a profitable company like Hampton repay its loan on time and why does it
need more bank financing? What major developments between November 1978 and
August 1979 have contributed to this situation?
Hampton has a substantial backlog of outstanding orders from respected customers
so need cash to purchase equipment to maintain production efficiency. In an effort
to conserve cash, very little has been spent on equipment in 1978 and 1979,
resulting in poor ability to maintain production at a capacity rate. Also, Hampton
had to wait for their suppliers to ship electronic control mechanisms, upsetting the
shipment schedule.

e. Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?
No, after doing the analysis of cash positions at the end of 1979, he is $341,000 short
of being able to repay the loan. Under the more conservative sensitivity analysis we
performed, taking the difference between forecasted and actual sales throughout
1979 to be 37% and discounting estimated sales from September-December, he is
$2,064,000 short on cash.

f. What action should Mr. Eckwood take on Mr. Cowins' loan request? What are the
major risks associated with the proposed loan? What other alternatives does Mr.
Eckwood have and what are the pros and cons? What would you do?
Mr. Eckwood should loan Mr. Cowins a smaller amount than the full requested loan.
Due to a great deal of their cash being tied up in Inventory and A/R at the end of the
year, Hampton will be unable to pay back the entire $1,350,000 loan on December
31
st
. Their projected sales estimates also predict them to be producing at 100%
capacity, and are not conservative estimates. As sales are rising a great deal from
1978, I would have faith in Hampton to repay the loan at some point in 1980 once
customers pay the A/R balance from December.

I would discuss the projected cash positions in the balance sheer with Mr. Cowins
and refuse the loan request in the current terms. I would suggest that Hampton offer
a discount of 2/10 on their A/R policy to facilitate faster cash collections and
reestablish a positive cash balance. The cons of rejecting this loan is that it can
inhibit Hamptons ability to produce at an efficient capacity and can damage future
sales. I would recommend that Hampton refrain from paying a dividend in the
current year and reinvest that money into the equipment needed for the companys
processes.