• Author / Uploaded
• Sam Sheehan

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Hampton Machine Tool Company

a. What is Hampton’s competitive position in the market place? Who are their suppliers? Who are the customers? After a variety of economic factors throughout the 1970s caused huge declines in the machine tool industry, including massive reductions in defense spending and declines in automobile production, Hampton survived the downtown cycles and captured an increased market share. Competitors were forced out of the industry, automobile sales stabilized and military aircraft sales increased considerably. Their competitive advantages include long-standing relationships with customers in the automobile and aircraft industries, a strong debt position with no previous outstanding debt, and relatively high cash positions throughout 1978 and1979. Their suppliers are machine part manufacturers and producers of scarcer raw material components. Customers include military aircraft manufacturers and automobile manufacturers in the St. Louis area. b. Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton's financial performance? Hampton repurchased the stock of several dissident shareholders to gain more control over the company. It is unclear why these shareholders were dissident, though it raises red flags as the shareholders could have insight into current company policies or future earnings uncertainties. Hampton repurchased the shares to quell these shareholders and maintain stricter control. This repurchase will raise the stock price, and shows that Hampton has trust in the ongoing future of the company. c. Why can't a profitable company like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 have contributed to this situation? Hampton has a substantial backlog of outstanding orders from respected customers so need cash to purchase equipment to maintain production efficiency. In an effort to conserve cash, very little has been spent on equipment in 1978 and 1979, resulting in poor ability to maintain production at a capacity rate. Also, Hampton had to wait for their suppliers to ship electronic control mechanisms, upsetting the shipment schedule.

e. Is Mr. Cowins correct in his belief that Hampton can repay the loan in December? No, after doing the analysis of cash positions at the end of 1979, he is $341,000 short of being able to repay the loan. Under the more conservative sensitivity analysis we performed, taking the difference between forecasted and actual sales throughout 1979 to be 37% and discounting estimated sales from September-December, he is $2,064,000 short on cash. f. 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 the pros and cons? What would you do? Mr. Eckwood should loan Mr. Cowins a smaller amount than the full requested loan. Due to a great deal of their cash being tied up in Inventory and A/R at the end of the year, Hampton will be unable to pay back the entire $1,350,000 loan on December 31st. Their projected sales estimates also predict them to be producing at 100% capacity, and are not conservative estimates. As sales are rising a great deal from 1978, I would have faith in Hampton to repay the loan at some point in 1980 once customers pay the A/R balance from December. I would discuss the projected cash positions in the balance sheer with Mr. Cowins and refuse the loan request in the current terms. I would suggest that Hampton offer a discount of 2/10 on their A/R policy to facilitate faster cash collections and reestablish a positive cash balance. The cons of rejecting this loan is that it can inhibit Hampton’s ability to produce at an efficient capacity and can damage future sales. I would recommend that Hampton refrain from paying a dividend in the current year and reinvest that money into the equipment needed for the company’s processes.