Executive Summary

Statement of the Problem

Hampton Machine Tool Company has successfully operated in the tool manufacturing business for the better part of a century. They have consistently had positive cash flows and revenues however recently have run into problems as they have obligations to customer for cash advances of $1,566,000. St. Louis National Bank recently loaned them $1,000,000 due September 30th. Hampton is now requesting an additional $350,000 loan for new equipment that will allow them to maintain production at a capacity rate. The bank must decide whether to make that loan to Hampton, and if so at what terms.

Discussion

Hampton ships out completed products as soon as they are finished and as a result does not carry any finished goods inventory. Although low on cash, Hampton has a substantial backlog of firm sales orders, from loyal customers that they expect with little doubt to collect on. As a company, Hampton has maintained conservative financial policies which have contributed to its survival in the violate capital goods industry. The company had no debt on its balance sheet during the ten years prior to December 1978.

Hampton requested the original $1,000,000 loan to upgrade their equipment before a major breakdown occurs which would be disastrous to Hampton, especially during this time when they have such a large backlog of orders. The new equipment should make Hampton much more efficient which will increase the percentage of accounts that they will collect on in the banks opinion. Although the new equipment will improve production, Hampton will still have a shot term cash shortage which would leave them with a negative cash balance in December, and unable to pay their employees.

If the additional $350,000 loan were granted, Hampton would not have a negative cash balance in December or any other month as long as the principal of the loan is extended into the new year. Obviously there is risk of default which must be mitigated through additional terms of...