Springfield Bank is evaluating Creek Enterprises, which has requested a $3,540,000 loan, to assess the firm’s financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages and Creek’s recent financial statements, evaluate and recommend appropriate action on the loan request.
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Industry averages |
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Debt ratio |
0.48 |
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Times interest earned ratio |
7.31 |
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Fixed-payment coverage ratio |
2.04 |
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(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
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Creek Enterprises Balance Sheet December 31, 2019 |
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Assets |
Liabilities and Stockholders’ Equity |
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Current assets |
Current liabilities |
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Cash |
$1,027,000 |
Accounts payable |
$7,988,000 |
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|
Marketable securities |
2,986,000 |
Notes payable |
7,974,000 |
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|
Accounts receivable |
12,015,000 |
Accruals |
523,000 |
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Inventories |
7,476,000 |
Total current liabilities |
$16,485,000 |
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Total current assets |
$23,504,000 |
Long-term debt (includes |
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financial leases)** |
$19,241,500 |
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Gross fixed assets (at cost)* |
Stockholders’ equity |
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Land and buildings |
$11,012,000 |
Preferred stock
(24,800 |
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| shares,
$4.00 dividend) |
$2,516,000 |
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Machinery and equipment |
20,536,000 |
Common stock
(1.11 million |
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Furniture and fixtures |
7,995,000 |
shares at
$5.25 par) |
5,827,500 |
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Gross fixed assets |
$39,543,000 |
Paid-in capital in excess of |
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par value |
4,007,000 |
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Less: Accumulated depreciation |
12,999,000 |
Retained earnings |
1,971,000 |
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|
Net fixed assets |
$26,544,000 |
Total stockholders’ equity |
$14,321,500 |
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Total liabilities and |
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Total assets |
$50,048,000 |
stockholders’ equity |
$50,048,000 |
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| *The firm has a 4-year financial lease requiring annual beginning-of-year payments of
$164,000. Three years of the lease have yet to run. |
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| **Required annual principal payments are
$790,000. |
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(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
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Creek Enterprises Income Statement for the Year Ended December31, 2019 |
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Sales revenue |
$29,961,000 |
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Less: Cost of goods sold |
20,962,000 |
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Gross profits |
$8,999,000 |
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Less: Operating expenses |
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Selling expense |
$2,967,000 |
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General and administrative expenses |
1,771,000 |
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Lease expense |
164,000 |
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Depreciation expense |
1,027,000 |
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Total operating expense |
5,929,000 |
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Operating profits |
$3,070,000 |
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Less: Interest expense |
1,013,000 |
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Net profits before taxes |
$2,057,000 |
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| Less: Taxes
(rate=21%) |
431,970 |
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Net profits after taxes |
$1,625,030 |
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Less: Preferred stock dividends |
99,200 |
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Earnings available for common stockholders |
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