Executive Summary
Statement of the Problem
English: Example of a loan contract, using flat ra...
Landon Donovan, during USMNT practice
Somebody Loan Me a DimeAs the vice president of the St. Louis National Bank (SLNB), Jerry Eckwood needs to decide on whether or not to approve Hampton Machine Tool Company's (Hampton) request to extend payment on an outstanding loan. Benjamin Cowins, president of Hampton, has requested until December 31st, 1979 to pay off their existing note of $1,000,000 ($1M) and also requested an additional loan for equipment of $350,000 ($350K). Given the situation, there are three decision alternatives that must be considered as outcomes. One, Mr. Eckwood declines both the extension and the additional loan and forces the default of Hampton. Two, Mr. Eckwood accepts Mr. Cowins' full proposal and grants the extension as well as the additional loan. Three, Mr. Eckwood uses an alternative solution. The alternative solution can mean granting the extension on the $1M loan but not the $350K extension, or even extending the maturity date. Mr. Eckwood's decision on whether or not to accept the extension on the $1M loan, as well as the additional $350K equipment loan (or one or the other) will be solely based on Hampton's ability to repay the loans upon the maturity date. This must be ascertained from thorough financial analysis of the company using a pro-forma financial statement, cash budgets, and profitability ratios.
Discussion
Both loans are both at given at an 18% annual interest rate. Mr. Cowins has provided sufficient documentation that indicates the loan will be paid back, as Hampton has many backlogged orders and shipments. However, Hampton has also historically over-projected its sales and shipments.
Option 1 should be a last resort due to Mr. Cowins' good and long-standing relationship with St. Louis Bank. If option 1 were taken, SLNB would lose a large, long-term client that has consistently brought in business for...