Hampton Machine Tool Company

1220 Words Sep 16th, 2009 5 Pages
Hampton Machine Tool Company

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?
A/ 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
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One of the main reasons for this negative cash balance may be that Hampton is experiencing liquidity problems, that is, they are not generating enough cash to pay for their current expenses. Another factor that may contribute to such phenomenon is the delays in production that Hampton has had because suppliers have not delivered the raw materials. The inventory conversion period is greater than what Hampton can finance because the cash conversion cycle is even greater than collections from customers.

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?

Some of the assumptions include: One assumption that should be clearly analyzed is that the collection period is of 30 days net. Not always customers have the ability and willingness to pay off their debts in 30 days, some may take more time, and some could incur in bad debt. Another assumption Hampton is making is that the company will be able to pay off debts in 30 days. There is no 100% certainty this will happen. The assumption that accruals and prepaid expenses will remain fairly stable and constant should be analyzed more clearly, because this is not always the case. Another assumption is that the shipments are going to be made exactly as they forecasted. It is important to note that in the

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