Term 3

Corporate Finance – II
Assignment 2

Hampton Machine Tool Co.

Faculty - Prof. Banikant Mishra
Research Assistant – Manshi Yadav

Case Analysis
Case Question – Prepare Cash Budgets for each of the four months - September to December 1979
- and infer whether both the existing and the additional/new loan can be repaid by the year-end.
Solution
Projected Cash budget September 1979 to December 1979 ( in Thousands $)
Particulars September October November December
Cash Receipts:
Accounts Receivables - Receipts (Note 1) $ 684.00 $ 1,323.00 $ 779.00 $ 1,604.00
Bank Loan $ 350.00
Total Cash Inflow $ 684.00 $ 1,323.00 $ 1,129.00 $ 1,604.00
Cash Expenditures:
Accounts Payable Payments* (note 2) $ 948.00 $ 600.00 $ 600.00 $ 600.00
Other monthly Outlays $ 400.00 $ 400.00 $ 400.00 $ 400.00
Interest (note 3) $ 15.00 $ 15.00 $ 20.25 $ 20.25
Machinery $ 350.00
Taxes $ 181.00 $ 181.00
Loan Principal $ 1,350.00
Dividend Payment $ 150.00
Total Cash Outflow $ 1,544.00 $ 1,365.00 $ 1,020.25 $ 2,701.25
Opening Cash balance $ 1,559.00 $ 699.00 $ 657.00 $ 765.75
- Net Monthly Cash Flow $ -860.00 $ -42.00 $ 108.75 $ -1,097.25
Closing Cash balance $ 699.00 $ 657.00 $ 765.75 $ -331.50

Assumptions and Notes

Note 1)

• Assuming net 30 days collection period is followed as mentioned in the case,

Accounts Receivables as at the Balance sheet, of August should be recovered full
September in Full.
• For October, Receivables of previous month of $2163 is adjusted with $840
advanced payment of General Aircraft. ($2163- $840)
• For November, Receivables of previous month of $1,505 is adjusted with the
remainder of advanced payment, $726. (Advance = $1,566- $840)
• For December, Full credit sales of previous month is realized as the advance payment
of General Aircraft is exhausted.
Note 2)

• Assuming net 30 days on materials purchased is followed, therefore according to the

balance sheet as at, August 1979, Accounts Payable of $948 would be paid full in
September.
• As mentioned in the case, remaining purchases are fixed at $600 for the next 4
months, and thus following net 30, the payments will be made a month after the
order.
Note 3)

Interest computation (in thousand $)

Initial Loan $1 Million interest @1.5%/month 15
Additional interest in November on 5.25
350,000@1.5%/month
Total 20.25

Concluding Statement
Whether both the existing and the additional/new loan can be repaid by the year-end by
Hampton Machine Tools?

It is evident from the analysis of Cash budget for the next 4 months, that Hampton Machine
will not be able to pay both the loans by the year-end 1979. If they do so, they end up with a
negative cash balance of -$331.50. So clearly, they should not repay both the existing and
new loan in December.

As the company is facing liquidity issue at year end, therefore the Hampton should not make
the Dividend payment of $150,000 despite their willingness to do so. It should reserve that
cash and use it to repay the initial $1 Million Debt it owes first. Once that is paid, it can
request the bank to extend the due date of $350,000 loan till January end, as credit sales of
$2,256,000 will be received in January, which will make cash available to repay the $350,000
with interest. If the new loan is not repaid in December, Hampton Machine will end up with
a positive cash balance of $18,500. Further if the Dividend payment is postponed, then
closing cash balance further increases to $168,500. This is our recommendation to Hampton
Machine after analysis of Projected Cash budgets prepared.

Group 3
Section A
Roll No.
20210128009
20210128007
20210128006
20210128013
20210128023
20210128034