Question: Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the company's financial leverage & financial risk. On the basis of the debt ratios for Creek, along with industry averages and Creek's recent financial statements [on the facing page], estimate & recommend appropriate action on the loan request.
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Creek Enterprises Income Statement for the Year Ended December 31, 2006
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Sales revenue
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$30,000,000
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Less: Cost of goods sold
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21,000,000
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Gross profits
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$ 9,000,000
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Less: Operating expenses
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Selling expense
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$3,000,000
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General and administrative expenses
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1,800,000
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Lease expense
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200,000
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Creek Enterprises Income Statement for the Year Ended December 31, 2006
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Depreciation expense
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1,000,000
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Total operating expense
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6,000,000
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Operating profits
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$ 3,000,000
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Less: Interest expense
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1,000,000
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Net profits before taxes
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$ 2,000,000
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Less: Taxes (rate = 40%)
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800,000
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Net profits after taxes
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$ 1,200,000
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Less: Preferred stock dividends
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100,000
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Earnings available for common stockholders
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$ 1,100,000
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Creek Enterprises Balance Sheet December 31, 2006
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Assets
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Liabilities and Stockholders' Equity
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Current assets
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Current liabilities
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Cash
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$ 1,000,000
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Accounts payable
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$ 8,000,000
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Marketable securities
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3,000,000
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Notes payable
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8,000,000
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Accounts receivable
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12,000,000
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Accruals
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500,000
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Inventories
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7,500,000
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Total current liabilities
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$16,500,000
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Total current assets
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$23,500,000
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Long-term debt (includes financial leases)b
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$20,000,000
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Gross fixed assets (at cost)a
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Stockholders' equity
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Land and buildings
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$11,000,000
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Preferred stock (25,000 shares,
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$ 2,500,000
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