Hampton Machine Tool Company Case

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TO: Jerry Eckwood, Vice President of St. Louis National Bank SECTION I
St. Louis National Bank has to decide whether or not to grant a loan renewal request by a local company, Hampton Tool Company. The existing loan is due to be repaid in fifteen days and the president of the company, Benjamin Cowins, is also requesting an additional loan of $350,000 for planned equipment purchases in October 1979. Until December 1978, Hampton Tools had maintained a capital structure of zero debt. In Dec. 1978, the company obtained a $1 million loan from St. Louis National Bank to use along with $2 million in excess cash for the repurchase of company stock from dissident shareholders. Hampton Tools was established in 1915 and experienced record production and profitability until around the mid-1970s. The decline in sales and profitability was due to massive reduction in demand because of the post-Vietnam War period and decline in automobile production in the St. Louis facilities. Hampton’s eventual recovery was due primarily to the increase in military sales, the stabilization of the automobile segment of the company’s market, and economic conditions in the mid-1970s had taken their toll on the capital goods industry. Hampton’s conservative financial controls in the past have no doubt contributed to its survival and success in the capital goods industry. Section II

The company experienced a short fall due to lack of cash resulting from the $2 million spent repurchasing the company’s stocks from the dissident shareholders. Although the repurchase sacrificed the firm’s excess cash, the repurchase can be thought of as a positive move by the firm to produce large-scale changes in the company’s capital structure. Also, the repurchase may be viewed as a positive signal by investors that the company’s shares are undervalued. Another cause of the company’s short fall is the combination of dependent events and statistical fluctuations. The fact that...
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