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Hampton Review Questions

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Hampton Machine Tool Co.

1. Why can’t a profitable firm like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 contributed to this situation?

- Hampton is having a hard time repaying its loan because of its steep decline in sales it experienced the past few years. This decline can be traced back to the oil embargo, increase of gasoline prices and the recession. After these three events began to dissipate, Hampton saw a steady increase in sales. Hampton needs more bank financing to purchase equipment to fill its large amount of backorders for the rest of the year. The reason it does not have enough current cash is because of unfilled orders which amounts to $16,500,000. Also, shipments have been on hold because they are waiting on parts from suppliers to complete $1,320,000 worth of inventories. The major developments that contributed to this situation include: suppliers are not being prompt with deliver of parts, as well as the large amount of backorders that have not yet been completed.

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.

3. Review the results of your forecast. Do the cash budgets and the pro forma financial statements yield the same results? Why?

4. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?

- There are a few factors that could alter the results. First, if the backorders of $16,500,000 do not get completed prior to year end it would certainly affect Hampton’s ability to repay the loan. If suppliers

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