hampton exhibits and pro formas for students (1)

Questions in English

Hampton Machine Tool Company

A bank lending officer must decide whether to extend and increase a loan to a small machine tool company. Case provides sufficient data for preparation of cash budgets and pro forma financial statements in order to analyze the lending officer's problem. Other issues that can be addressed include the impact of stock repurchase, dividends, advanced payments by customers, as well as general sensitivity analysis.

2. Based on the information in the case, prepare a projected cash budget for the four months September through December 1979. (ST-2)

3. Based on the information in the case, prepare a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979 (ST-3,4)

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

2. part. Each question 10 marks

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

5. 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?

6. What action should Mr. Eckwood take on Mr. Cowins' loan request? What are the major risks associated with the proposed loan? What other alternatives does Mr. Eckwood have, and what are their pros and cons? What would you do?

7. Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton's financial performance?

8. Critically asses Hampton's dividend policy. Do you agree with Mr. Cowins' proposal to pay a substantial dividend in December?


A bank lending officer must decide whether to extend and increase a loan to a small machine tool company. Case provides sufficient data for preparation of cash budgets and pro forma financial statements in order to analyze the lending officer's problem. Other issues that can be addressed include the impact of stock repurchase, dividends, advanced payments by customers, as well as general sensitivity analysis.

2. Based on the information in the case, prepare a projected cash budget for the four months September through December 1979. (ST-2)

3. Based on the information in the case, prepare a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979 (ST-3,4)

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




7. Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton's financial performance?

8. Critically asses Hampton's dividend policy. Do you agree with Mr. Cowins' proposal to pay a substantial dividend in December?


A bank lending officer must decide whether to extend and increase a loan to a small machine tool company. Case provides sufficient data for preparation of cash budgets and pro forma financial statements in order to analyze the lending officer's problem.




Exhibit 1

Actual

1979 January $1,302 $861February 1,872 672March 1,635 1,866April 1,053 1,566May 1,293 873June 1,479 1,620July 1,488 723August 1,797 507

Eight months total $11,919 $8,688

September $1,299 $2,163October 1,347 1,505November 1,311 1,604December 2,298 2,265

Exhibit 1 Shipments at Selling Price (thousands of dollars)

As ForecastDecember

1978As Forecast

September 1979

Exhibit 2

1978 1979

November December March June

Cash $2,520 $491 $505 $1,152Accounts receivable, net 1,245 1,863 1,971 1,893Inventories 2,601 2,478 3,474 3,276

Current assets 6,366 4,842 5,950 6,321

Gross fixed assets 4,010 4,010 4,010 4,010

Accumulated depreciation 2,998 3,010 3,040 3,070

Net fixed assets 1,012 1,000 970 940Prepaid expenses 62 40 39 24

Total assets $7,440 $5,872 $6,959 $7,285

Notes payable, bank -- $1,000 $1,000 $1,000Accounts payable $348 371 681 399Accruals 561 777 849 678

150 74 373 354Customer advance payments 840 1,040 1,040 1,566

Current liabilities 1,899 3,262 3,943 3,997

Common stock ($10 par value) 1,178 428 428 428Surplus 4,363 2,182 2,588 2,860

Net worth 5,541 2,610 3,016 3,288

Total liabilities and net worth $7,440 $5,872 $6,959 $7,285

of $181,000 due on the fifteenth of April, June, September, and December for estimated 1979 tax liability withany underpayment of 1979 taxes due March 15, 1980.

Exhibit 2 Balance Sheets, 1978-1979 (thousands of dollars)

Taxes payablea

aTax payments in 1979 included $75,000 due March 15 on underpayment of 1978 taxes and four equal payments

Exhibit 2

1979

July August

$1,678 $1,5591,269 6843,624 4,764

6,571 7,007

4,010 4,010

3,080 3,090

930 92024 42

$7,525 $7,969

$1,000 $1,000621 948585 552

407 4791,566 1,566

4,179 4,545

428 4282,918 2,996

3,346 3,424

$7,525 $7,969

of $181,000 due on the fifteenth of April, June, September, and December for estimated 1979 tax liability withTax payments in 1979 included $75,000 due March 15 on underpayment of 1978 taxes and four equal payments

Exhibit 3

EightFiscal Months

Year Ending December 1979 Ending12/31/1978 1978 January February March April May June July August 8/31/1979

Net sales $7,854 $1,551 $861 $672 $1,866 $1,566 $873 $1,620 $723 $507 $8,668

5,052 1,122 474 369 1,362 1,137 567 1,197 510 276 5,892

Gross profit 2,802 429 387 303 504 429 306 423 213 231 2,796

1,296 248 103 61 205 172 96 130 87 66 920

Interest expense -- -- 15 15 15 15 15 15 15 15 120

Net income before taxe 1,506 181 269 227 284 242 195 278 111 150 1,756Income taxes 723 87 129 109 136 116 94 133 53 72 842

Net income $783 $94 $140 $118 $148 $126 $101 $145 $58 $78 $914

Dividends $50 $25 -- -- -- -- -- $100 -- -- $100

Exhibit 3 Income Statements, 1978-1979 (thousands of dollars)

Cost of salesa

Selling and administrative expenses

aIncludes depreciation charges of $150,000 in 1978, $12,000 in December 1978, and $10,000 per month in 1979.

Cash Flows and Operating Activities August 31, 1979

Decrease in receivablesDecrease in prepaid expensesIncrease in accounts payableIncrease in tax payableIncrease in customer advancesDecrease in accrualsIncrease in inventories

Net cash provided (used) by operating activities

Cash flow form Investing ActivitiesNet decrease in property, plant and equipment (a)

Net cash used for investing activities

Cash Flows from Financing ActivitiesProceeds from bank loanCash paid for dividendsCash paid for stock repurchased

Net cash provided by financing activities

Net increase (decrease) in cash during periodCash at beginning of periodCash at end of period

Exhibit SN-1-2 A Statement of Cash Flow November 30, 1978 - August 31, 1979 (thousands of dollars)

Net income (December 1978 + Eight Months Ending 31/8/1979)

A Statement of Cash Flow November 30, 1978 - August 31, 1979 (thousands of dollars)

Exhibit SN-2 Projected Cash Budget, September 1979 through January 1980 (thousand of dollars)

September October NovemberReceipts

Collections of receivables (a) (b) ( c )Bank loan

Total cash inflow

ExpendituresPayments of accounts payables (d)Other operating outlays (e)Capital expendituresTax payments (f)Interest payments - bank loanPrincipal payments - bank loansDividends

Total cash outflow

Beginning cash balanceNet monthly cash flow

Ending cash balance

Note: Other assumptions stated in the case

(a) Assumes a 30-day collection period.(b) $2163 minus $840 advance( c ) $1505 minus $726 rest of advance of General Aircraft Corporation( d ) Assumes a 30-day payable period(e) Assumes $400 per month(f) See note (a) in Ex. 2 and Ex. 4

Exhibit SN-2 Projected Cash Budget, September 1979 through January 1980 (thousand of dollars)

December January

Sales

Cost of sales and other expensesProfit before taxes (EBT)

Taxes

Profit after taxesDividends

Addition to retained earnings

(a) Since prepaid expenses and accrued expenses are assumed to be uncharged, other expenses are equal to other expendituresTherefore,

Total costs = Cost of Sales + Other Expenditures, or

Total costs = Reduction in WIP inventories+Reduction in raw materials inventories + Four months' purchases + Depreciation (b)+ Four months' other outlays + Four months' interest

(b) Depreciation of new machine : $350 straight-line for eight years = $43.75 or 3.65 per month

Depreciation for September - December = Four months on old equipment plus two months on new equipment

Exhibit SN-3 Pro Forma Income Statement, September 1979 through December 1979 (thousand of dollars)

Projected sales for September, October, November,DecemberSee note (a)

48% of profit before taxes minus $35 investment tax credit

Proposed December dividend

(a) Since prepaid expenses and accrued expenses are assumed to be uncharged, other expenses are equal to other expenditures

Total costs = Cost of Sales + Other Expenditures, or


(b) Depreciation of new machine : $350 straight-line for eight years = $43.75 or 3.65 per month

Depreciation for September - December = Four months on old equipment plus two months on new equipment

Pro Forma Income Statement, September 1979 through December 1979 (thousand of dollars)

Exhibit SN-4 Pro Forma Balance Sheet, December 31, 1979 (thousand of dollars)

CashAccount receivableInventories

Current assets

Gross fixed assetsAccumulated depreciation

Net fixed assetsPrepaid expenses

Total assets

Account payableAccrualsTaxes payable

Current liabilities

Net worth

Total liabilities and new worth

Exhibit SN-4 Pro Forma Balance Sheet, December 31, 1979 (thousand of dollars)

Plug, reconciliation with cash budgetDecember's sales$4765 minus $ 1320 reduction in work-in-progress minus $ 420 in raw materials

$ 4010 + $______ ?capital expenditures

Unchanged from August 31, 1979

December's purchasesUnchanged from August 31, 1979$ 479 minus $___? tax payments + $ ____? liability September through December

$ 3424 + $____? retained earnings September through December

Exhibit SN-1 Sources and Uses of Funds, November 30, 1978 - August 13, 1979 (thousands of dollars)

Sources

Increase in bank debtIncrease in retained earningsDecrease in cashIncrease in customer advancesIncrease in account payableDecrease in account receivableIncrease in taxes payableDecrease in net fixed assetsDecrease in prepaid expenses

Total sources

UsesStock repurchaseIncrease in inventoriesDecrease in accruals

Total uses

Exhibit SN-1 Sources and Uses of Funds, November 30, 1978 - August 13, 1979 (thousands of dollars)

hampton exhibits and pro formas for students (1)

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