Essays.club - Get Free Essays and Term Papers
Search

Hampton Machine Tool Company

Autor:   •  November 20, 2017  •  1,102 Words (5 Pages)  •  459 Views

Page 1 of 5

...

Cost of sales = purchases + other outlays – change in inventory

Cost of sales = $1,320 reduction in WIP inventory + $420 reduction in RM inventory + $2,400 purchases + $1,600 other outlays

Cost of sales = $5,740.

Other expenses =$47 Depreciation + $70 4 month’s interest = $117.

Depreciation of new machines: $350 straight line for 8 years = $43.75 or $3.65 per month. Depreciation for September – December = 4 months on old equipment plus 2 months on new equipment = $40 + $7.

The division of expenses between cost of sales and other expenses is immaterial. What matters for this exercise is the sum of the two.

Pro Forma Balance Sheet December 31, 1979

Cash

$(331)

Plug.

Accounts receivable

2,265

December sales.

Inventories

3,024

$4,764 - $1,320 reduction in WIP - $420 reduction in RM.

Total current assets

$4,958

Gross fixed assets

$4,300

$4,010 + $350 capital expenditure.

Acc. Depreciation

3,137

$3,090 + $47 depreciation.

Net fixed assets

$1,223

Prepaid expenses

42

Unchanged from 8/31/79.

Total assets

$6,223

Accounts payable

$600

December purchases.

Accruals

552

Unchanged from 8/31/79.

Taxes payable

888

$479 - $362 tax payments + $771 liability Sept. thru Dec.

Total current liabilities

$2,040

Net worth

4,183

$3,424 + $759 retained earnings Sept. thru Dec.

Total liabilities & net worth

$6,223

- Do the cash budgets and pro forma financial statements yield the same results? Why, why not?

Hint: they should.

Further hint: If you relied on the statement on page 6, “… our engineering estimates indicate that we expect to earn a profit before taxes and interest of about 23% on sales on these shipments,” they wont. Consider instead using the following accounting relation in constructing your income statement.

Beginning inventory + purchases + other expenses – cost of goods sold = ending inventory

Yes. The plug of -$331,000 equals the December ending cash balance of -$331,000.

- Is Mr. Cowins correct in his belief that Hampton can repay the loan in December? Does it appear he might be able to repay the loan early next year?

Hampton appears unable to repay the loan in December. However, if you extend the cash budget another month through January 1980, it appears the company can repay the loan early next year.

- What earnings is Hampton forecasting for 1979? How do these earnings compare to the size of the bank loan? What are the company’s return on assets and return on equity for 1979? How large is the company’s potential loan collateral in the form of accounts receivable? What should Mr. Eckwood do with regard to the loan request?

Projected 1979 earnings

$1,823,000. ($914 + 909).

Projected earnings / bank loan

1.35 times (1.823 / 1.35).

1979 ROA

29% (1,823 / 6,223 using end of period assets).

1979 ROE

43.5% (1,823 / 4,183 using end of period net worth).

December accounts receivable / bank loan.

1.67 times (2,265 / 1,350).

Despite Hampton’s inability to repay by year-end, this appears to be a safe loan from the bank’s perspective. The loan is less than one year’s profits at current operations, returns are quite high, the company has almost a full year’s backlog at what we are told are profitable prices, and the company has significant collateral in the form of accounts receivable. We might note, however, that December receivables are high. There would be less collateral in other months.

Finally, we might note that Hampton borrowed money from the bank to meet long term needs, stock repurchase and new equipment. It is asking a lot of a business to repay loans used for long term purposes within a few months. The bank should not be surprised to find that Hampton cannot repay the loans as rapidly as originally intended.

I would certainly renew and increase the loan.

- What were the company’s earnings per share in 1978? What would this number have been using the number of shares outstanding after the share repurchase?

1978 earnings = $783,000. 1978 shares outstanding = 117,800 (11/78 balance sheet, Common stock = $1,178,000 and par value is $10 per share.) Earnings per share = $6.65 (783 / 117.8).

After repurchase there were 42,800 shares outstanding. Ignoring

...

Download:   txt (7.9 Kb)   pdf (84.8 Kb)   docx (16 Kb)  
Continue for 4 more pages »
Only available on Essays.club