Hampton Case

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...