Case 4: Hampton Machine Tools Company
EXECUTIVE SUMMARY
Hampton Machine Tools Company has recently requested its bank, the Saint Louis National Bank to allow the company to delay the principal payment of its outstanding $1M loan due on September 1979 to the end of the year. In addition to this, it is also requesting an additional $350,000 loan for the purchase of needed equipment by October.
Using the financial statements and reports presented by the company, the bank assessed whether it is reasonable for them to grant the company’s requests. Pro forma income statements and projected cash budgets for the remaining four months of the year were made and analysed for the evaluation.
Since the bank found out with the given projections that the company will not be able to pay according to the original terms, the bank made some adjustments to determine the terms that would be more realizable.
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 instalment 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.
CASE CONTEXT:
September 14, 1979. St. Louis National Bank was considering a loan request from a company located in a nearby city, Hampton Machine Tool Company. Since its establishment in 1915, the company had successfully weathered the severe cyclical fluctuations characteristic of the machine tool manufacturing business and had experienced record production and profitability during the mid- and late- 1960s. But Hampton sales had bottomed out in the mid- 1970s and the several years prior to 1978 had been a steady rebuilding of sales.
Hampton Machine Tool Company had requested renewal of an existing $1 million loan originally to be repaid on September 30. Aside from that, Hampton was also asking for an additional loan of $350,000 for planned equipment purchases in October. With respect to the terms of the company's request, both loans, totaling $1.35 million, would be repayable at the end of 1979.
