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Hampton Machine Tool

In: Business and Management

Submitted By margotkett
Words 300
Pages 2
At the end of December 1978, Hampton Machine Tool took out a $1 million loan from the St. Louis National Bank. On September 14, 1979, the company asked for an extension of the loan to the end of December 1979. Moreover, Hampton has asked for an additional $350,000 loan to be repaid at the same time as the previous loan. Both loans are to be repaid with monthly interest payments at the rate of 1.5%. The underlying problem affecting Hampton Machine Tools is its ability to payback its current loan and the requested one on time. Indeed, according to Exhibit 1, if Hampton carries forward as forecasted, the company will be short $331,500. The company could restructure its loan by paying interests ahead of time. However, while it would lessen the company’s cash shortage, Hampton would still have a negative balance by December. The issue is that the company should be able to repay the debt in January. Thus, the company should have asked for an extension up to January instead of December: the company neglected its selling terms of 30 days. While it would be wise for Mr.Eckwood to reject the proposal because his main concern should be the borrower’s repayment of the loan, which Hampton Machine Tool is unable to do on time, I would advise him to modify the terms of the loan. Indeed, Mr. Eckwood should renegotiate the terms of the loan in order to allow Hampton to extend its payment for one month. However, the modification should not come for free: if I were Mr. Eckwood, I would penalize Hampton Machine Tool by increasing the rate of the interest payments. Furthermore, I think that Hampton Machine Tool should cancel the payment of its dividends in order to strengthen its...

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