Hampton Case Solution

Hampton Machine Tool Company

Carl Gallagher

Hampton Machine Tool Company (HMTC), was established in 1915, and dealt largely with automobile and military aircraft manufacturers in St. Louis. The president of HMTC took out a loan for 1 million dollars to buy stocks back from stockholders. He sent a letter to the vice president of the bank requesting the loan be extended until the end of the year, and to add an additional $350,000 to the loan.

After a financial analysis, I have determined that HMTC would not be able to repay the $1.35 million loan in time. Given the projections, they would need an additional month to pay off the loan in full. As the vice president of the bank, I would not loan the money under the present conditions. If negotiations might occur, then possibly implementing a higher interest rate for the additional month may be in the best interest of both parties. The original agreed interest rate was 1.5%, adding .25% to that rate for the additional month would generate the bank $26,625.

Ratios

The projected rise in the profitability, liquidity, and leverage ratios are due to the equipment purchases HMTC made with the loan. Sales would immediately increase after the 13% loss suffered in September. The projections are in favor of the credit line extension.

Current Cash Budget

The cash budget for HMTC is a bit more crucial in this decision than analyzing the ratios. The current cash budget shows little issues with liquidity, and inventory can be quickly converted to cash from increased sales. The cash budget shows much improvement from the new equipment purchases. HMTC would no longer require additional loans to fund operations. Although they are self-sustaining, they still have the debt to pay back. HMTC will still owe $331,500 at the end of the year. The company could even pay their loans sooner to decrease the interest expense and cease paying dividends and still come up short $163,500.

When forecasting the first month of the year, the...