Hampton Machine Tool Company -Case Write-up
On September 12, 1979, Hampton Machine Tool Company requested from St. Louis National Bank a renewal to their loan of $1,000,000 due to be repaid on September 30, 1979 and also to be given an additional loan of $350,000 for new equipment purchases in October 1979. Both loans were to be repaid on December 31, 1979. Hampton M.T. Company wrote a letter to the St. Louis National Bank stating the reasons for the extension of the loan and the need of the additional loan, and giving the current and the predicted future financial position of the company. In order to decide whether to approve the loan extension and the additional new loan, the bank examine the financial position of the company for the following months to come and calculate the forecasted Income Statement and Cash Flow Analysis to find out if the company will have the required cash flows to repay their loan and interest on time. Since the bank found that the company will not be able to pay its loan on time, so the bank made some adjustments to determine the terms that would be more achievable. The bank then decided to grant the company the additional $350,000 loan due on January 1980 with the condition that it must pay the principal of its first loan on a monthly installment until December. In addition to this, the company should also delay its dividend payment for a month to be able to prioritize the repayment of its debts. First it is important to examine why HMTC was unable to repay its initial loan.
1- Why can’t a profitable company like Hampton repay its Bank Loan on time and why does it need more bank financing? Hampton Machine Tool Company was unable to repay its loan on time due to many reasons. One reason is the fact that the stock repurchase, for which the loan was initially requested, was a major cash disbursement of $3 million. In the period between November 1978 and August 1979, stock repurchase represented 58% of total costs...
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