Global Team Write Up
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Why cant 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?
I think the main reason that Hampton cant repay its loan on time is because the company bought back 75,000 of shares at a cost of $3 million ($1 million from the loan, and $2 million of cash). The company has also poorly forecasted sales from January to August which is $11.9 million with actual sales amounting to $8.7 million. The company wants to borrow more money because it wants to buy new machinery at a cost of $350k and this is due to no machinery being replaced because of their economic downturn.
The company purchased $420k worth of raw materials, which it will use by the end of the year. There was a substantial backlog of orders amounting to $16.5 million on 31st August. There was a missing piece of electronic equipment to finish some machines valued at $1, 320,000 which was due to arrive and then the orders can be finished. The company needs to stay positive on a daily basis in order to finance its operations and business expansion.
2. Based on the information in the case, prepare a projected cash budget for each of the four months September through December 1979, a projected income statement for the four month period September through December, 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?
5. 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!?