Executive Summary - Hampton

Executive Summary

Statement of the Problem

Hampton Machine Tool Company, (HMTC), is scheduled to repay St. Louis National Bank, (SLNB), a $1,000,000 loan due at the end of September 1979. HMTC took the loan to repurchase stock from several dissident stockholders. On September 14, 1979, Mr. Benjamin G. Cowins, president of HMTC, requested SLNB renew the loan until the end of 1979, and asked for an additional $350,000 to finance HMTC equipment purchases. The proposed interest rate is the current rate of 1.5% per month. Despite HMTC’s profitability, its inability to repay its loan on time is cause for concern. Either accepting or rejecting the proposal provides substantial risk for SLNB, and consequently the bank needs to also consider submitting a counterproposal.

Discussion

HMTC is a stable company that reliably survives cyclical downturns in its business. Currently, the company is struggling to maintain a positive cash flow without defaulting on its loan. The cash flow problem is not for lack of sales, as the company’s backlog of sales is approximately $16,500,000 (about 90% of annual capacity). Attribute the company’s cash issues to its large stock repurchase (an outflow of $3,000,000), a bottleneck in its shipment schedule due to delayed delivery by suppliers, and plans for a $150,000 dividend in December 1979.

If SLNB rejects the proposal HMTC will default on the repayment of the current principal ($1,000,000) when it is due at the end of September 1979. It is clear that HMTC needs both the loan extension and additional cash for new equipment in order to realize the profits achievable through its sales backlog. However, if SLNB accepts the loan proposal, HMTC will default on the repayment of the larger principal ($1,350,000) in December 1979. The planned dividend combined with the large principal repayment projects a $331,000 cash shortage for HMTC at the end of December 1979. Considering Cowins is a respected executive, and HMTC has the capacity to...