Hampton Machine Tool Company, a profitable machine tool manufacturer, is trying to renew a 1 million dollar loan due September 30, 1979 until December 31, 1979. Through examination of the case, it is clear that Hampton will be unable to repay the loan; however, at first glance Hampton seems to be a profitable company that would be able to pain the loan on time and would not need more bank financing. Unfortunately, that is not the case. Hampton, by making a stock repurchase for which the loan was taken, forced a major cash expenditure onto the company a year prior- costing Hampton almost a 3 million dollar loss forcing Hampton to push back the date on the loan. Since a whole year went by with less cash on hand, it was nearly impossible for Hampton to be able to pay its loan on time. For example, 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. Furthermore, Hampton needs more bank financing ($350,00) because they had not been in contact with new equipment since the recession hit; it is important to the success of a company to be up to date on the newest equipment, especially dealing such important equipment. Moreover, Hampton needs more bank financing because of the vast amount of backorders and lack of current cash. Hampton claims the request is vital because it will improve the operational efficiency of the company, but cannot afford the new machinery without more financing. This was due also to the fact that raw materials were attained before immediate need, so the company ended up spending an extra $420,000 on raw materials that the company didn’t need. The cash expenditure they incurred in 1978 had a trickle-down effect that hurt the company in many different ways, finally causing a delay in repaying its loan.

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