Entrepreneurial Finance

Read the case study on Hampton Machine Tool Company and learn about entrepreneurial finance. Get answers to various questions related to the case study. Desklib provides expert study material for students.

Running head: ENTREPRENEURIAL FINANCE
Entrepreneurial Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1ENTREPRENEURIAL FINANCE
Table of Contents
Answer to Question a:................................................................................................................2
Answer to Question b:................................................................................................................2
Answer to Question c:................................................................................................................3
Answer to Question d:................................................................................................................4
Answer to Question e:................................................................................................................5
Answer to Question f:................................................................................................................5
References:.................................................................................................................................7

2ENTREPRENEURIAL FINANCE
Answer to Question a:
After numerous economic factors throughout the 1970s have resulted in massive
downfalls in the machine tool sector including significant minimizations in defense spending
and fall in automobile production, Hampton managed to survive such downturn cycles. This
is because it uses to be a regional leader in the manufacturing business. Firstly, it had
managed to increase its market share, since few thinly capitalized rivals had been driven out
of the market owing to the adverse economic conditions during 1970s. As a result, there was
stability in automobile sales and considerable rise in military aircraft sales. The competitive
advantages of the organization include long-standing associations with the customers in the
aircraft and automobile sectors, a strong debt position having no prior outstanding debt and
considerably better cash positions during 1978 and 1979.
The main suppliers of Hampton Machine Tool Company include the suppliers of raw
materials like steel and iron plants, brass suppliers and other machine part manufacturers.
Moreover, since the organization has to buy equipment for production, it could be assumed
that the organization would have suppliers like metal stamping press company, lathe
company and others (Abor 2017). The customers of the organization include automobile
manufacturers and military aircraft manufacturers in the area of St. Louis.
Answer to Question b:
Since the shareholders of Hampton have varying views on the operations of the
organization for strengthening the authority of the latter, the same decided to repurchase the
stocks from the dissident shareholders. It was not clear as the reasons that made the
shareholders dissident were not identified. However, red flags were raised, since the
shareholders could have a look into the then existing policies or future earnings uncertainties

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associated with the organization. Hampton bought back those shares for quelling the
shareholders along with maintaining stricter control (Audretsch et al. 2016).
As observed from the case study, Hampton had incurred $3 million for repurchasing
75,000 common stocks. This caused minimization of $3 million from shareholders’ equity as
well as cash, which reduced $75,000 from ordinary shares and $2.5 million from the surplus.
When viewed from the long-term perspective, such reconstruction could have impact on
earnings per share of the organization. This is because earnings per share are computed by
dividing net income by ordinary shares (Block et al. 2018). When the ordinary shares were
repurchased, it would cause the denominator or ordinary shares to fall and then the earnings
per share would rise resulting in favorable stock price of the organization.
Answer to Question c:
The primary reason identified behind the inability of Hampton in repaying its loan
timely is that it had repurchased 75,000 shares at a price of $3 million. This amount included
$1 million from loan and $2 million from cash. Moreover, the sales forecast of the
organization had been poor from January to August of $11.9 million; however, the actual
sales generated were $8.7 million. The organization intended to borrow additional money, as
it planned to purchase new machinery at price of $350,000. This is because the machinery
was to be substituted owing to economic downturn (Cumming and Vismara 2017).
Along with this, Hampton bought raw materials worth $420,000, which it would
utilize by the end of the year. Furthermore, the orders had been backlogged considerably
worth $16.5 million on 31st August. An electronic component was missing for completing
few machines valuing $1,320,000. The machine had not arrived, due to which the orders
could not be completed timely (Cumming, Pandes and Robinson 2015). Moreover, the delay
was increasing inventory considerably and this had obstructed in creating a steady cash flow

4ENTREPRENEURIAL FINANCE
for the organization. Therefore, it is required for Hampton to remain positive on cash daily
for funding business diversification and expansion.
Answer to Question d:

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Answer to Question e:
After critical evaluation of the provided information based on the case study, it could
be stated that Mr. Cowins is not correct in his assumption. This is evident from the forecast of
the balance sheet statement represented in the above section. Mr. Cowins had assumed that he
would be able to repay the loan in December. However, he fell $59,577 short of repaying the
overall amount of loan to be repaid. Moreover, it had been analyzed that if Hampton Machine
Tools Company repays the total amount of loan of $1.35 million back to the St. Louis Bank,
there would be cash shortage of $2,996,000. For balancing the balance sheet statement of the
organization, negative cash was required, which is not possible in accordance with the
prevailing accounting standard (Fassin and Drover 2017). In such situation, Mr. Cowins
would be compelled to close its business operations because of inefficient cash flows.
However, based on the projected balance sheet statement of the organization for Hampton, it
could be stated that the loan could be repaid by the end of December.
Answer to Question f:
Firstly, Mr. Eckwood was needed to conduct better forecast of balance sheet
statement before undertaking the loan. Based on the analysis, if no changes were made in
accounts receivable and balance sheet statement, there would be two adverse consequences
for Hampton. Firstly, it would be unable to repay the loan and secondly, funds would be
required for maintaining effective cash position. Even though the revenue stream of the
organization is not too much poor, the significant financial issue was the low inventory
turnover for maintaining effective cash flow (Fraser, Bhaumik and Wright 2015). However,
as stated by Mr. Cowin, the orders from clients with additional cash for the next few months
would help in overcoming that situation. On the other hand, there would be negative effects

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because of short-term funding crunches. For dealing with this situation, the following
strategies are suggested to Mr. Eckwood:
 The loan request of Mr. Cowin should not be approved by Mr. Eckwood. The
significant risk, in this case, is that the loan could not be repaid, if the operations were
not changed accordingly. In this rate, there was high chance of bankruptcy for Cowin
and the loan might not be repaid fully (Harrison, Botelho and Mason 2016).
 Alternatively, the loan could be extended until 30th September past the due date. This
would provide the organization to obtain additional time for gathering funds to repay
the loan. However, if Cowin did not succeed and become bankrupt, the money could
not be obtained in future by Eckwood even after seizure of personal assets.
Therefore, the feasible strategy for Eckwood would be to extend the due date of the
loan along with imposing increased interest rate. This would enable Cowins to clear its loan
balance and the bank would earn additional money from interest.

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References:
Abor, J.Y., 2017. Introduction to Entrepreneurial Finance. In Entrepreneurial Finance for
MSMEs (pp. 3-19). Palgrave Macmillan, Cham.
Audretsch, D.B., Lehmann, E.E., Paleari, S. and Vismara, S., 2016. Entrepreneurial finance
and technology transfer. The Journal of Technology Transfer, 41(1), pp.1-9.
Block, J.H., Colombo, M.G., Cumming, D.J. and Vismara, S., 2018. New players in
entrepreneurial finance and why they are there. Small Business Economics, 50(2), pp.239-
250.
Cumming, D.J. and Vismara, S., 2017. De-segmenting research in entrepreneurial
finance. Venture Capital, 19(1-2), pp.17-27.
Cumming, D.J., Pandes, J.A. and Robinson, M.J., 2015. The role of agents in private
entrepreneurial finance. Entrepreneurship Theory and Practice, 39(2), pp.345-374.
Fassin, Y. and Drover, W., 2017. Ethics in entrepreneurial finance: Exploring problems in
venture partner entry and exit. Journal of business ethics, 140(4), pp.649-672.
Fraser, S., Bhaumik, S.K. and Wright, M., 2015. What do we know about entrepreneurial
finance and its relationship with growth?. International Small Business Journal, 33(1), pp.70-
88.
Harrison, R.T., Botelho, T. and Mason, C.M., 2016. Patient capital in entrepreneurial finance:
a reassessment of the role of business angel investors. Socio-Economic Review, 14(4),
pp.669-689.