You are on page 1of 1

Hampton case study

Why can't and profitable firm like Hampton repay its loan on time and why does it need more bank
financing? What major developments between November 1987 and August 1979 contributed to this
situation?

Hampton Machine Tool Company was unable to repay its loan on time due to
several factors. One of such factors is the fact that the stock repurchase, for
which the loan was initially requested, was a major cash disbursement of $3
million. In the period between November 1978 and August 1979, stock
repurchase represented 58% of total expenditures for that period, while inventory
purchases represented 42% of total expenditures.

There were some developments that also contributed to this situation. For
instance: The shipment has been upset by the suppliers delay of sending the
electronic control mechanisms to Hampton. This has influenced the decrease of
cash from past months as for example the accumulated orders have not been
filled. Raw materials were acquired before immediate need. The company has
spent $420,000 for the purchase of this type of inventory. Since December 1978,
Hampton has spent $3 million on repurchasing stocks of several dissident
shareholders. The $181,000.00 tax payment in December.

The $150,000.00 dividend payment in December. We consider that this dividend
payment must not be made.

There can be several reasons why Hampton Machine Tool Company couldnt repay its loan on time. To
begin with after requesting the loan of 1 million dollars which was requested to postpone. In mid December
almost immediately acquiring the loan Hampton has purchased its shares

Q 2:
Based on the information in the case, prepare a projected cash budget for the four months September
through December 1979, a projected income statement for the same period, and a pro forma balance sheet
as of December 31, 1979.
A 2: