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and automobile manufacturers in the St. Louis area. Hampton felt the boom in the
1960 with record setting profits in the mid to late 1960. Hampton slowed down in the
1970s with the withdrawal from Vietnam War and the oil embargo. Hampton
stabilized by the late 1970s and now has a larger market share, as other competitors
were unable to make it through those tough times. Hampton¶s conservative financial
policy helped the firm to weather the business cyclical fluctuation in capital goods
industry, and had no debts on its balance sheet during ten years prior to 1978.
Traditionally, the company had kept its cash balances at St. Louis National Bank.
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It is now September 14, 1979; President of Hampton Mr. Benjamin G. Cowins has
asked Mr. Eckwood for an extension to the end December 1979 on the $1 million
loan they took out from the St. Louis National Bank at the end of December 1978.
The loan was originally taken out on the terms of monthly interest payment at a rate
of 1.5% with the principle to be paid back at the end of September 1979. Hampton
also has asked for an additional $350,000 loan to also be repaid at the end of
December 1979 with interest payments monthly at the rate of 1.5%. The additional
loan is necessary for Hampton to update its machinery, which they have not done
since the economy went into a recession. The problem s are : Is Hampton Machine
Tool Company able to payback it's current loan and the additionally requested loan
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from the St. Louis National Bank, what action should Mr. Eckwood take on Mr.
Cowins¶ loan request, What are the major risks associated with the p roposed loan
Based on the information provided by Mr. Cowins, an analysis of cash funding and
usage that Hampton had from November 1978 to August 1979 is below:
surplus from $2182, 000 to $2996, 000, Increase in customer advances $726,000
accounts receivable $561,000, in net fixed assets $92,000 and Decrease in prepaid
expenses $20,000.
According the analysis above, there is a l arge amount of cash disburses because of
inventories that is negatively affect cash on hand that Hampton has. The total amo unt
of change in cash, customer advances and taxes payable is $2,016,000, which is not
Hampton to have new financial obligation, and the company might be unable to repay
the whole amount at the end of 1979 . In addition, Hampton borrowed money from the
bank to meet long-term needs, stock repurchase and buying new equipment. So, it is
expected to take long time more than what originally intended to repay the
r
Perspective, as Hampton is successful company that has long profitable history and it
expects huge increase in sales and return from September to December. Also, its
income has increased from $783,000 in 1978 to $914,000 in 1979 which lead to
increase earnings per share 3 times from $6.65 ($783 / 117.8) in 1978 to $21.36
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This ratio is important to determine how profitable is the company and it will affect the
company access to debt finance, the valuation of company¶s common stock, the
It indicates how well the company employs its assets. Ineffective utilization of assets
will result in additional need of finance; unnecessary interest cost and low return on
capital.
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March *une *uly Aug
0.27 0.22 .10 .06
It measures the relationship of funds supplied by creditors and funds supplied by the
owner. Debt ratio = total liability / total assets. The lower the better.
.
It measures the ability of business firm to repay its short term obligation without using
its inventory.
Based on above ratios, Hampton has low and decreasing profitability and activity
ratios from March to August in 1979. That means the company is not using its assets
effectively to increase their sales and generate more profits, which might continue in
the coming month and negatively affect the ability of Hampton to pay back its debts
at the end of the year. Moreover, Hampton has stable and acceptable debt ratio, and
it is able to cover its interest expenses. The liquidity ratio is increasing which is
positive, but its acid test ratio is decreasing and below one, which m eans it, cannot
cover its short term debts without using or selling inventory. Therefore, Hampton
should control its inventory size by using effective inventory control policies.
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There are fife aspects that determine the creditwo rthy of the borrower: cash,
Hampton has a relatively good creditworthy. Its cash was fluctuating and decreasing,
but it is able to generate more cash in the coming months, and it has other sources of
current assets to draw upon to repay its loans. Hampton has good options like
account receivable, inventory and common stocks that can be used by bank as
collaterals if Hampton did not repay the loan. Also, the owner is successful man, and
The bank has two options, either to accept or reject the Hampton's request. On the
other side, Hampton has different options to cover its need of cash:
1. Request additional fund of $ 350,000 from bank with extension of one $ million
existing loan to the end December 1979 at % 1.5 monthly interest rate.
2. Not pay dividends; this will save $150,000 but still leave them at a shortage of
cash. It may be costly because some stockholders could sell their share to ge t
reduce the interest payments. This will help reduce the amount of interest paid
in total, however this solution does not eliminate the problem of still being in
4. They can look for an advance payment from one or many of their current
customers to help cover the shortfall. This may cause consumers to lose
confidence in Hampton and hurt their chance of repeat business. There is also
5.