Hampton Case Study
Feb. 9, 2015
Hampton Machine Tool Company
I. Summary Hampton Machine Tool Company (HMTC) is a machine tool manufacture that serves automobile manufacturers and military aircraft manufacturers. It was established in 1915 and has survived numerous economic cycles through the years. HMTC has survived due to it conservative financial policies. The company has been able to maintain a strong working capital position to help guard against the economic uncertainty. This has allowed HMTC to stay debt free for years on its balance sheets leading up to December 1978. In December of 1978 a loan was requested by Benjamin G. Cowins, President of HMTC, for the amount of $1 million. Jerry Eckwood, the Vice President of St. Louis National Bank, approved the request of the $1 million loan so that HMTC could took repurchase Hampton stock from several dissident shareholders. The loan was structured so that HMTC would make monthly interest payments at in interest rate of 1.5% per month with the principal due at the end of September 1979. Now in September of 1979 Mr. Cowins sent a letter to Mr. Eckwood asking to extend the loan to December of 1979 and requested an additional $350,000. With in this letter HMTC supplied its financial statements leading up to September of 1979. In response to this request we constructed forecasted financial statements based off of the information HMTC provided including a Cash Budget, an Income Statement and a Balance Sheet. The Cash Budget provides us that based on the numbers HTMC has given us they will not have sufficient funds to repay the $1.35 million loan at the end of December 1979. However HMTC will have sufficient funds to pay back the loan in January. For this reason the original proposal to extend the loan to the end of the year will be rejected and instead we, the bank, should renegotiate to extend the loan for another month, for December 1979 to January 1980, with an interest rate increase. In order for both parties to be happy and meet sufficient funds I recommend that the bank makes a counter offer to extend the deadline of the loan to be payed back in January with an increased interest rate of 2% and tell HMTC to hold off making a dividend payment until January and increase the dividend to $200,000 to reward the patient stockholders. I would expect that HMTC would make another counter offer to make the interest rate 1.75%. I would suggest taking this counter offer which would be meeting in the middle. This would allow HMTC to buy its new equipment to help drive operations and make to possible for HMTC to pay off its outspend loan that is owed to the Bank. While the bank would be able to make a more secure loan investment with a higher interest income. I will get into the process on how I came to this recommendation, the key problems and questions that had to be faced, the different alternative scenarios that could have been taken, my full specific recommendation and the difficulties posed in this case as it relates to my recommendation.
II. Identification of Key Problems and Questions The main question to be answered is whether the bank should approve the loan extension and the additional $350,000 that goes with it. As the proposal stands the loan should not be approved due to have negative $332,000 at the end of December. So the next problem is how to move money around so that HTMC has the funds to pay back the loan. How to more the Repayment of Principal around in order to create funds. We, as the bank, also want to make this loan work somehow because that is how we make money. But there is also a question of how reliable are the shipping estimates that HMTC has given in their letter. It has been shown that they have not come to meet their estimates in the past. So as a creditor we need to factor in a safely net or a margin so that if they don't meet their estimates we, the bank, still get payed. So in order to insure there is a margin we, the bank have made a
