Hampton Machine Tool

1545 Words Apr 12th, 2012 7 Pages
Hampton Machine Tool Company -Case Write-up

Summary:
On September 12, 1979, Hampton Machine Tool Company requested from St. Louis National Bank a renewal to their loan of $1,000,000 due to be repaid on September 30, 1979 and also to be given an additional loan of $350,000 for new equipment purchases in October 1979. Both loans were to be repaid on December 31, 1979. Hampton M.T. Company wrote a letter to the St. Louis National Bank stating the reasons for the extension of the loan and the need of the additional loan, and giving the current and the predicted future financial position of the company. In order to decide whether to approve the loan extension and the additional new loan, the bank examine the financial position of the company
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The cash budget only includes the cash the company has at the start of the business as well as items that they will be paying for in cash. On the other hand, a pro forma income statement takes into account projected revenues from sales. Projected sales minus cost of goods sold as well as other expenses tell the net income. The pro forma income statement, in the end, gives projected profit, whereas the cash budget sheet in the end informs whether or not the business will be lacking cash to operate. In Hampton Machine Tool, the December ending cash balance is not equal to the projected revenues from sales. This means that HMTC is projected to lose cash and will need that much cash in order to continue operating. That’s why HTMC requested the additional loan from the bank
5-Critically evaluate the assumptions on which your forecasts are based. What developments could alter the results? Is Mr. Cowins correct in his belief that Hampton can repay its loan in
December?
It is important to explain some of the assumptions made in the pro forma statement, as they play a critical part in determining the forecasted revenues. Cost of sales was determined by the equation purchases + other outlays – change in inventory, other outlays = cost of sales. Other Expenses was calculated by adding depreciation costs and four months’ worth of interest, which came to $47,000 (depreciation)+ $70,000(

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