Hanover Hose Company Harvard Case Solution & Analysis

Hanover Hose situation Analysis

The Hanover Hose Company manufactured plastic hose for farm, garden and light industrial use. The company purchased raw plastic from the domestic as well as from the foreign sources and mixed with other raw materials. The Hanover Hose Company had difficultly while attracting the large customers due to the capacity constraints during the housing boom of the mid-2000s. Therefore the company had taken the expansion program of $10.0 million that they completed in September 2007.Out of the total $9.0 million had been supplied by the long term debt were as $1.0 million are being generated from the operations of the company.

The company has requested the Mr. Garfield loan officer at the Booth National Bank to increase the seasonal loan of the company in order to increase the inventories and to raise the cash balance. As the cash balance of the company has dropped to the amount $440,000 to the $ 1 million and they need to carry their operation of which the company required the loan from the bank. The current credit line for the company was $11.0 million at the rate of 10 percent that it wants to increase to $ 14.0 million. The company borrowed $9.0 million at the 8.75 percent of the expansion plan from the Harrison Mutual Life Insurance during the year 2006.

The two major stakeholders of the company were president and vice president. The dividend payments were a significant part of their income. The company has had the satisfactory relationship with the bank since 1932, which provide all the seasonal working capital to the Hanover Hose.

The company required the additional loan because of the several reasons. Firstly, the cost of the plastic was increasing so, they want to buy the raw plastic at low cost as it was anticipated that the prices will increase more in the future that affect the cost structure of the company. It was also expected that in the future the company may face difficulty in obtaining the low cost plastic.

Secondly, the prediction of prolonged recession was another reason that the company needs the increase in the lines of credit. The prices of the oil were also increasing that were expected further increase in the coming years as it may affect the cost of the raw material which company purchased. In addition to this, the increase was also anticipated in the prices of the petrochemical products that would create another complication for the company in the future. The scarcity of the domestic plastic and the rapid increases in the prices of the petroleum had necessitated the company enter into a contract to purchase the plastic from the foreign sources. So, the scarcity of the domestic plastic is another reason that the company wants to increase its inventory by borrowing the loan from the Booth National Bank.

As the company had suffered a serious problem such as oil prices and the supply disruptions in the past that made difficult for the company to obtain the raw material from the foreign sources. However, Mr. Oates the treasurer of the Hanover Hose Company though that the chances of the same problem's occurrence in the future were also high. Therefore, the company wants to purchase the raw material before the prices of the plastics get highly increased in order to increase their inventory level.

There were some management practices that affected the performance of the company. The sales, forecasting of the management was not accurate. Secondly, the projected sales were never achieved by the company, there were always the difference between their actual sales and forecasted sales. Thirdly, the projections of the company related to the sales were not realistic as the management of the company were not effectively analyzing and forecasting the current and future situations for the company. Therefore, these practices were the reason for the company's under performance.

Analysis of Projected Cash Flows

Projected Cash Flow Statement of six months from April to September shows a good picture of cash and cash equivalent held by the company. The company will generate an amount of $10.59 million from its operating activities which exhibits effective operations of the company. It also shows that the liquidity of the company will be maintained at an appropriate level. Working capital is favorable as collection from debtors will occur regularly, which is shown by the decrease in debtors from an amount of $5.6 million. Inventory movement is quite balanced. Another important thing is no change in accounts payable, which shows that HHC is intending to pay its creditors regularly while purchasing on credit by the same amounts.

Investing activities show that company is planning to purchase some property, plant or equipment to expand its production capacity. It means that the company is foreseeing the demand of its product to increase or it.......................

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