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Hampton Machine Tool Company, a machine tool manufacturer, was founded in 1915.

Hamptons customer base is made up primarily of military aircraft manufactures and automobile manufactures in the St. Louis area. Hampton felt the boom in the 1960s with record setting profits in the mid to late 1960s. Hampton slowed down in the 1970s with the withdrawal from Vietnam War and the oil embargo. Hampton stabilized by the late 1970s and now has a larger market share as other competitors were unable to make it through the tough times. It is now September 14, 1979 Hampton has asked for an extension to the end December 1979 on the $1 million loan they took out from the St. Louis National Bank at the end of December 1978. The loan was originally taken out on the terms of monthly interest payment at a rate of 1.5% with the principle to be paid back at the end of September 1979. Hampton also has asked for an additional $350,000 loan to also be repaid at the end of December 1979 with interest payments monthly at the rate of 1.5%. The additional loan is a must for Hampton to update its machinery which they have not done since the economy went into a recession. The problem currently facing Hampton Machine Tool Company is the ability to payback its current loan and the additionally requested loan from the St. Louis National Bank. If Hampton carries forward as planned they will be short $331,500.(Exhibit 1) Ways to fix the current problem are to not pay dividends; this will save $150,000 but still leave them at a shortage of $181,500. Payment of dividends would be a nice gesture to stockholders that have stood by them, but may be at too great of cost. Stockholders do not want to see the stock ultimately become valueless. They would rather forgo dividends now if it means their stock will still have value and they may receive dividends in the future. Not paying the dividends is the number one thing Hampton must remove from their current cash budget plan. They can start to repay some of the principle as soon as possible to reduce the interest payments. This will help reduce the amount of interest paid in total (Exhibit 2). While this solution does not eliminate the problem of still being unable to repay the full loan, they are able to lessen their cash shortage. The assumptions I used for this budget was that approximately $500,000 on hand is all they will need from month to month. I also assumed the $500,000 on hand is not earning interest which would also help generate cash which would help in repayment. The ending cash on hand for October is $710,000 to help cover for November which has a larger amount of cash outflows then cash inflows. This on its own would bring their cash shortage to $319,500 a savings of $12,000. Still this along with the removal of the $150,000 in dividends will still not eliminate their cash shortage. With the two combined, they still will have a shortage of $169,500. (Exhibit 3) They can extend the repayment to the future when it will be possible for them to be repaid. I have worked a cash budget out into January of 1980 when they will be able to collect the cash from the large number of orders they expect to finish in December. I made the assumption that the proceeds from a sale would not be collected until next month since their sales terms are net 30 and most companies would wait the full thirty days to pay Hampton. Assuming all other cost remain the same they will be able to repay both loans in full, make a $200,000 dividend payment and still have $885,500 cash on hand.(Exhibit 4) This is using the assumption that they started to repay the loans ahead of time and did not pay the dividends. They can look for an advance from one or many of their current customers to help cover the shortfall. This may cause consumers to loose confidence in Hampton and hurt their chance of repeat business. There is also no grantee that customers will provide the advances. They should have their current cash invested somewhere making a minimal return. I have done a cash flow assuming they were able to invest into a savings account making a 3% APR compounded monthly. (Exhibit 5) This may only have a nominal effect on their current problem, but is a move they should make nonetheless. I have assumed they have not been doing this since they show no interest revenue on their income statement. This would not solve their short cash flow problems, but it would be a sound practice to implant for the future. A savings account is a safe nonvolatile place to have the money and it is instantly accessible to Hampton. They should also change their billing policy to help finance the projects. They should bill their customers monthly based on the percentage of completion method currently a general accepted accounting principle. This will help them match the cash flows from the jobs with related expenses and will remove their cost of financing the jobs. This is an assumption that changing away from their current billing process will not result in lost jobs in the future. They will not be able to start this with their current jobs, but rather new ones coming in. If they are able to start these new jobs by October they will be able to bill the consumers at the end of October and expect payments from them by the end of November. The consumers billed at the end of November should get their payments in be December 30th given the current net 30 payment terms which would make it sufficient time for this amount to be available to help repay the loan. They may want to resell some of the treasury stock they bought with the original $1,000,000 loan to generate cash with which they can repay part of the loan. However, doing this may put their

stock back into the undesirable position it was in before, which is why they took out the loan in the first place. If I was St. Louis National Bank, I would have to reject the loan on the current terms proposed by Hampton Machine Tool Company. They show an inability to repay the loan based on the numbers they have forecasted, which they continually fall short of. However, in the interests of the relationship with Hampton the bank may want to grant Hampton the loan anyway. The terms must be reworked to assure they will get paid and will also leave Hampton in a manageable situation allowing them to continue to be a profitable customer of the bank. The bank may bring up the already previously mentioned solutions, but they will want to make sure they put Hampton on a repayment plan so they may some time in the future collect the principal of the loan. Exhibit 1: Hampton Machine Tool Company Current Cash Budget Sept. Oct. Nov. Dec. Total Cash on Hand from past 1,559,000 699,000 1,007,000 765,750 1,559,000 Collections from Consumers 684,000 1,323,000 779,000 1,604,000 4,390,000 Total Cash Avliable 2,243,000 2,022,000 1,786,000 2,369,750 5,949,000 Intrest on 1st Loan 15,000 15,000 15,000 15,000 60,000 Principle first loan 1,000,000 1,000,000 Principle Second Loan 350,000 350,000 Intrest on 2nd Loan 5,250 5,250 10,500 Dividend Payment 150,000 150,000 Sept 15 Tax Pay 181,000 181,000 Dec 15 tax Pay 181,000 181,000 All other expenses 400,000 400,000 400,000 400,000 1,600,000 Pay AP of Aug 948,000 948,000 Payment for inventory 600,000 600,000 600,000 1,800,000 Total Expenditures 1,544,000 1,015,000 1,020,250 2,701,250 6,280,500 Ending Cash Balance 699,000 1,007,000 765,750 -331,500 -331,500 Exhibit 2 Hampton Machine Tool Company Cash Budget with start of Payment Sept. Oct. Nov. Dec. Total Cash on Hand from past 1,559,000 499,000 710,000 473,250 1,559,000 Collections from Consumers 684,000 1,323,000 779,000 1,604,000 4,390,000 Total Cash Available 2,243,000 1,822,000 1,489,000 2,077,250 5,949,000 Interest on 1st Loan 15,000 12,000 10,500 10,500 48,000 Principle first loan 200,000 100,000 700,000 1,000,000 Principle Second Loan 350,000 350,000 Interest on 2nd Loan 5,250 5,250 10,500 Dividend Payment 150,000 150,000 Sept 15 Tax Payment 181,000 181,000 Dec 15 Tax Payment 181,000 181,000 All other expenses 400,000 400,000 400,000 400,000 1,600,000 Pay AP of Aug 948,000 948,000 Payment for inventory 600,000 600,000 600,000 1,800,000 Total Expenditures 1,744,000 1,112,000 1,015,750 2,396,750 6,268,500 Ending Cash Balance 499,000 710,000 473,250 -319,500 -319,500

Exhibit 3 Hampton Machine Tool Company Cash Budget With Start of Payment and removal of Dividends Sept. Oct. Nov. Dec. Total Cash on Hand from past 1,559,000 499,000 710,000 473,250 1,559,000 Collections from Consumers 684,000 1,323,000 779,000 1,604,000 4,390,000 Total Cash Available 2,243,000 1,822,000 1,489,000 2,077,250 5,949,000 Interest on 1st Loan 15,000 12,000 10,500 10,500 48,000 Principle first loan 200,000 100,000 700,000 1,000,000 Principle Second Loan 350,000 350,000 Interest on 2nd Loan 5,250 5,250 10,500 Dividend Payment 0 Sept 15 Tax Payment 181,000 181,000 Dec 15 Tax Payment 181,000 181,000 All other expenses 400,000 400,000 400,000 400,000 1,600,000 Pay AP of Aug 948,000 948,000 Payment for inventory 600,000 600,000 600,000 1,800,000 Total Expenditures 1,744,000 1,112,000 1,015,750 2,246,750 6,118,500 Ending Cash Balance 499,000 710,000 473,250 -169,500 -169,500 Exhibit 4 Hampton Machine Tool Company Cash Budget if repayments are extended one Month Sept. Oct. Nov. Dec. Jan. Total Cash on Hand from past 1,559,000 499,000 710,000 473,250 530,500 1,559,000 Collections from Consumers 684,000 1,323,000 779,000 1,604,000 2,265,000 6,655,000 Total Cash Available 2,243,000 1,822,000 1,489,000 2,077,250 2,795,500 8,214,000 Interest on 1st Loan 15,000 12,000 10,500 10,500 5,250 53,250 Principle first loan 200,000 100,000 350,000 350,000 1,000,000 Principle Second Loan 350,000 350,000 Interest on 2nd Loan 5,250 5,250 5,250 15,750 Dividend Payment 200,000 200,000 Sept 15 Tax Payment 181,000 181,000 Dec 15 Tax Payment 181,000 181,000 All other expenses 400,000 400,000 400,000 400,000 400,000 2,000,000 Pay AP of Aug 948,000 948,000 Payment for inventory 600,000 600,000 600,000 600,000 2,400,000 Total Expenditures 1,744,000 1,112,000 1,015,750 1,546,750 1,910,500 7,329,000 Ending Cash Balance 499,000 710,000 473,250 530,500 885,000 885,000 Exhibit 5 Hampton Machine Tool Company Cash Budget with investment of cash Sept. Oct. Nov. Dec. Total Cash on Hand from past 1,559,000 699,000 1,008,247 768,809 1,559,000 Collections from Consumers 684,000 1,323,000 779,000 1,604,000 4,390,000 Intrest on cash 0 1,247 1,812 1,274 Total Cash Available 2,243,000 2,023,247 1,789,059 2,374,083 5,949,000 Interest on 1st Loan 15,000 15,000 15,000 15,000 60,000 Principle first loan 1,000,000 1,000,000 Principle Second Loan 350,000 350,000 Interest on 2nd Loan 5,250 5,250 10,500

Dividend Payment 150,000 150,000 Sept 15 Tax Payment 181,000 181,000 Dec 15 Tax Payment 181,000 181,000 All other expenses 400,000 400,000 400,000 400,000 1,600,000 Pay AP of Aug 948,000 948,000 Payment for inventory 600,000 600,000 600,000 1,800,000 Total Expenditures 1,544,000 1,015,000 1,020,250 2,701,250 6,280,500 Ending Cash Balance 699,000 1,008,247 768,809 -327,167 -331,500