Executive Summary
Statement of the Problem
On September 14th, 1979, Hampton Machine Tool Company (HMT) asked St. Louis National Bank (SLNB) for an extension on a previous $1,000,000 loan as well as an additional loan of $350,000. The original $100,000,000 loan was taken down on December 31st, 1978, has monthly interest payments of 1.5%, and is due in 16 days on September 30th, 1979. HMT, an established and loyal customer of SLNB, now requests SLNB to extend the original $1,000,000 loan to be due on December 31st, 1979. In addition, HMT is asking for a new loan of $350,000 to purchase new equipment. The new loan would take effect on October 31st, 1979, have the same monthly interest rate of 1.5%, and also be due on December 31st, 1979. HMT believes that the purchase of new equipment and the upcoming arrival of essential components from their suppliers will allow it to pay off both loans of $1,350,000 by the end of the year. SLNB must take action quickly, for if no extension is granted, HMT will default on their original loan in 16 days and go bankrupt. SLNB is faced with three alternatives: allow HMT to default by not granting an extension, accept HMT’s proposal, or counter the proposal with different terms.

Discussion
The first and most simple action for SLNB is to allow HMT to default by not granting an extension on the loan. However, this decision would not be beneficial to either HMT or SLNB. Forcing HMT to default would result in a loss of a valuable business relationship, damage to the reputation of the firm, as well as a forfeiture of the monetary value of the outstanding balances.
The second option SLNB has is to accept HMT’s proposal and terms, extending the original loan and issuing a new loan. Yet, after analyzing HMT’s projections, the terms appear unfavorable. Based on the projections, HMT will have a negative cash balance of $331,000 as of December 31st, 1979. HMT also plans to pay dividends in the amount of $150,000, only further depleting its cash and ability to pay off the loan. In addition, HMT’s terms are the same as the original loan, which is not reasonable due to different conditions and riskiness of HMT.
Lastly, SLNB can grant the extension and the additional loan, but counter with new terms. SLNB can restrict HMT from paying out dividends until it has paid off its original loan. This would increase HMT’s cash balance on December 31st,