CASE ANALYSIS:

HAMPTON MACHINE
TOOLS COMPANY
GROUP 6.
RAMOS.RODRIGUEZ.SHUKLA.SIBAL.TANTE
NGCO.TIA.
Company Background
Founded in 1915 Defence and Automobile
Machine Tool Manufacturer
Record Breaking Profits in 1960-1970
Experienced slowdown after mid-1970s
No debt for the past ten years
Balance Sheets, 1978--1979 (thousands of dollars)
1978 1979
Nov. Dec. Mar. June July Aug.
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 equal
payments of $181,000 due on the 15th of April, June, September, and December for estimated 1979 tax
liability with any underpayment of 1979 taxes due March 15, 1980.
Balance Sheet
Income Statements, 1978--1979
(thousands of dollars)
Fiscal Eight
Year Months
Ending Dec. 1979 Ending
31/12/78 1978 Jan. Feb. Mar. Apr. May June July Aug. 31/8/79
Net 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.
Income Statement
Shipments at Selling Price (thousands of dollars)

As Forecast As Forecast
Dec. 1978 Actual Sept. 1979
1979 January $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
$0
$500
$1,000
$1,500
$2,000
$2,500
Forecast Actual
Shipments
Problem Area
No 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
loan
ADVANTAGES DISADVANTAGES
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.)
Source: Investopedia.com
ADVANTAGES DISADVANTAGES
Debt : 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
Extending Credit Term & $350,000 additional
loan
Assessing Hampton End of
Year
FORECAST BALANCE SHEET
Sept Oct Nov Dec
Cash 699 1007 766 -332
AR 1,323 779 1,604 2,265
Inventories 3,339 3,234 3,129 3,024
Current Assets 5361 5020 5499 4957
Gross Fixed Assets 4010 4360 4360 4360
Accumulated Depreciation 3,100 3,110 3,124 3,137
Net Fixed Assets 910 1,250 1,236 1,223
Prepaid Expenses 42 42 42 42
Total 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 Stock 428 428 428 428
Surplus 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 STATEMENT
Sept Oct Nov Dec
Sales 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 Options
Long-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 cash
Collateral & 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.