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Hampton Machine Tool Company
Background
Hampton Machine Tool Company was established in 1915 to engage in the machine tool manufacturing business. The company’s major customers included the aircraft manufacturers and automobile manufacturers in the St. Louis area. Since the establishment, Hampton’s conservative financial policy helped the firm to weather the business cyclical fluctuation in capital good industry, and had no debts on its balance sheet during ten years prior to 1978. President of Hampton is Mr. Benjamin G. Cowins. Traditionally, the company had kept its cash balances at St. Louis National Bank.
Request
The request is for the renewal of its term debt of $1 million, which originated in the end of December 1978 and would due in the end of September 1979. In additional to the extension of this loan, Hampton also requested another $350,000 to finance equipment purchases. This loan would be needed by the end of October and payable at the end of the year with monthly interest of 1.5% of principal.
Cash Analysis
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:
Change in Cash Funding Usage
Increase in bank debt $1,000,000 Stock repurchase $3,000
Increase in retained earnings $883,000 Increase in inventories 2,163
Decrease in cash $961,000 Decrease in accruals 9
Increase in customer advances $726,000 TOTAL USES OF CASH $5,172
Increase in accounts payable $600,000
Decrease in accounts receivable $561,000
Increase in taxes payable $329,000
Decrease in net fixed assets $92,000
Decrease in prepaid expenses $20,000
Total Cash Funding $5,172,000

According the analysis above, there is a large amount of cash disburses to inventories that drain out the cash on hand that Hampton has. The total amount of...