Hampton Executive Summary

Executive Summary

Statement of the Problem

September 14, 1979, Hampton Tools is going to default on their loan within two (2) weeks. A combination of problems has led Hampton to this position. Hampton took out their initial loan of $1 million for the purpose of purchasing the stock of a group of dissident shareholders. This loan was to be paid back at 1.5% per month and is due at the end of September 1979. This loan was based largely upon forecast sales that Hampton had given to the bank. Over the period from January through August 1979 Hampton sold completed only 73% of their projected sales.

This failure to meet forecast production levels can be attributed to three major factors. First, a major component supplier failed to deliver their part on time. This caused Hampton to have seven (7) machines worth $1.32 million completed except for the production of these parts. Second, the company bought $420,000 worth of components over its normal levels of inventory. Hampton expects to cut materials purchases by $600,000 per month for the remainder of the year as a result of this early purchase. Third, the company's machines are at the end of their lifespan and have caused Hampton problems with maintaining capacity production. Hampton also wants to pay the company's remaining shareholders a dividend of $150,000 in December 1979. For these reasons, Hampton would like an extension on the original loan until the end of 1979, along with an additional loan of $350,000 at 1.5% per month, also due at the end of the year.

Discussion

There are multiple decisions that the bank could make in regard to this request. The first would be to allow Hampton to default September 30 by not granting them the extension on their original loan. The positives to this tactic would be that it would cut the bank's losses on this customer, and it would also keep the bank from throwing more money at a poorly performing customer that is nearing default. The negatives of this route are that Hampton is in a poor foreclosure position. The company's machines are near the end of their lifespan and would not fetch an