Hampton Machine Tool Company
1. Why can't a profitable firm like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 contributed to this situation?
A/ Hampton Machine Tool Company was unable to repay its loan on time due to several factors. One of such factors 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 expenditures for that period, while inventory purchases represented 42% of total expenditures. There were some developments that also contributed to this situation. For instance: …show more content…
Another assumption is that operating expenses will remain constant at $400,000. Again, there are many factors that may alter this amount, such as training of employees, inflation, etc. A final assumption is that there will be no allowance for any customer advance payment.
As shown by the ending cash balance of December, Mr. Cowins is wrong in his belief that the company will be able to repay its loan. At the time, the company would have a negative cash balance of $331,500. An option would be for Mr. Cowins to repay the initial $1 million loan, and ask the bank for an extension on the date of payment of the additional $350,000.
5. What action should Mr. Eckwood take on Mr. Cowin's loan request? What are the major risks associated with the proposed loan? What other alternatives does Mr. Eckwood have, and what are their pros and cons? What would you do?
Hampton should present a stable capital before the bank grants the new loan. It is recommended to decline the petition if the loan made is capital investment for the company. That is because the potential for return on the investment is limited strictly to the interest on the loan, and the potential loan would exceed the reward. He should evaluate also the capacity of the firm to meet its regular financial obligations and to repay the loan. The company could be presenting profits, but what about the cash. In the last months it has decreased by a