Analysis of Hampton Machine Tool Company Financing

Case Background
The Hampton Machine Tool Company is facing problems in paying its $1 million loan and requesting for
a new loan from the St. Louis National Bank. Hampton has notified the St. Louis National Bank that they
will not be able to repay in September. Also, they have requested an extension.
Hampton used the initial loan plus $2 million in excess cash to repurchase a substantial fraction of its
outstanding common stock, because it had decreased sufficiently in value. Although the company had
good intentions to increase its stock value, the companys finances have suffered because of the
repurchase. Mr. Cowins offer to pay $150,000 in dividends in December is not practical as Hamptons
finances will deteriorate, resulting to a negative cash flows.
Case Analysis
The company cannot afford to repay the loan in December, if they proceed with their original plans. The
company will have a negative cash flow in December. The company should request a one-month
extension on the loan since they cannot afford to make a loan payment in December. Extending the loan
repayment one month until January allows for account receivables of December to become collected,
because of the company collection policy of 30 days net.
Moreover, Hampton cannot afford to make a dividend payment in December. Cancelling the dividend
payment will free up $150,000 in December, keeping the net cash flow in the positive, which
compensates for the $350,000 loan payment. This will also help keep the net cash flow positive in
December, as well as waiting for accounts receivables of $2,265,000 to come in January for the final
payment. This makes the company profitable for the future, and, in turn, the stock will not become
valueless.
Recommendation
I recommend that Hampton Machine Tool Company should request a one month extension on the loan,
and cancel the dividend payment to make the company more profitable.
As for the Bank, Mr. Jerry Eckwood, vice-president of the St. Louis National Bank, should reject the
$350,000 loan request based on the current terms proposed by Hampton Machine Tool Company. There
is an inability to repay the initial loan. The numbers would show that the company will not be able to
repay the original loan in December without even considering the requested loan. However, with the
proper changes in the financial data and loan due date extension, both loans can be fully repaid by
January. The extension of the loan and cancellation dividends will place Hampton in a manageable
situation, allowing them to continue to be a profitable customer of the bank.