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Hampton Machine Tool Co. has established itself as a leading player in the St. Louis machine manufacturing marketplace. It previously obtained a loan from a bank and now wishes to extend and increase its loan. The bank officer is in a quandary whether to grant the application for extension and increase. This case study looks into the financial and other data that must be considered by the bank officer in deciding whether to grant Hampton's application.
David W. Mullins
Harvard Business Review (280103-PDF-ENG)
July 15, 2002
Case questions answered:
- What is Hampton Machine Tool Co.’s competitive position in the marketplace? Who are their suppliers? Who are the customers?
- Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton's financial performance?
- Why can't a profitable company like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 have contributed to this situation?
- Based on the information in the case, prepare a (single) projected income statement for the period September 1979-December 1979 and a projected balance sheet as of December 31, 1979.
- Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?
- What action should Mr. Eckwood take on Mr. Cowins' loan request? What are the major risks associated with the proposed loan? What other alternatives does Mr. Eckwood have and what are the pros and cons? What would you do?
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Case answers for Hampton Machine Tool Co.
This case solution includes an Excel file with calculations.
1. What is Hampton Machine Tool Co.’s competitive position in the marketplace? Who are their suppliers? Who are the customers?
Since being established in 1915, Hampton Machine Tool Co. has established itself as a leading player in the St. Louis machine manufacturing marketplace. Strong leadership, conservative financial policies, and a more substantial amount of working capital than their competitors have all allowed them to be a profitable firm during economic booms and has granted them the ability to maneuver economic downturns successfully. Being one of the few companies to make it through these downturns has allowed them to secure and hold a significant market share.
Hampton’s suppliers are the manufacturers of the raw materials (iron, steel, etc.) that supply them with the necessary materials to construct the machines they sell, along with the electronics manufacturers that send them the parts required to keep the machines up and running. Their customers are the military, aircraft manufacturers, and automobile manufacturers in the St. Louis area.
2. Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton’s financial performance?
Although it is not 100% clear why Mr. Cowins and Hampton Machine Tool Co. repurchased a substantial fraction of its outstanding stock, it is safe to assume the referenced “dissident” shareholders had simply disagreed with the company’s current policies and/or did not agree with the direction Mr. Cowin wanted to take the company in the coming years. Buying back all of the equity these dissident shareholders held allowed Mr. Cowins to make decisions in the way he deemed fit without having to consult as many shareholders. To summarize, Hampton repurchased the stock in order to gain more control over the company’s inner-workings.
The impact of this repurchase on Hampton’s financial performance was not good. In order to fund this $3 million transaction, Mr. Cowins was forced to use up almost all of the company’s excess cash and take on debt for the first time in the form of a $1 million loan. Since this purchase drained almost all of the company’s cash reserves, Hampton was forced to delay the purchase of equipment that would allow the company to produce in a more efficient manner (hence his request for a second, $350,000 loan to fund these equipment purchases).
3. Why can’t a profitable company like Hampton repay its loan on time, and why does it need more bank financing? What major developments between November 1978 and August 1979 have contributed to this situation?
Simply put, Hampton Machine Tool Co…
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