Springfield Bank is evaluating Creekâ Enterprises, which hasrequested a $ 3,720,000 loan, to assess theâ firm's financialleverage and financial risk. On the basis of the debt ratios forâCreek, along with the industry averages andâ Creek's recentfinancialâ statements, evaluate and recommend appropriate action onthe loan request.
Industry averages
Debt ratio
0.47
Times interest earned ratio
7.29
âFixed-payment coverageratio 2.03
Creek Enterprises Incomeâ Statement:
Creek Enterprises Income Statement for the Year Ended December31, 2019
Sales revenue $30,045,000
Less: Cost of goods sold 20,995,000
Gross profits $9,050,000
Less: Operating expenses
Selling expense $2,968,000
General and administrative expenses 1,832,000
Lease expense 237,000
Depreciation expense 999,000
Total operating expense 6,036,000
Operating profits $3,014,000
Less: Interest expense 1,002,000
Net profits before taxes $2,012,000
Less: Taxes (rate=21%) 422,520
Net profits after taxes $1,589,480
Less: Preferred stock dividends 103,700
Earnings available for common stockholders $1,485,780
Creek Enterprises Balanceâ Sheet:
Creek Enterprises Balance Sheet December 31, 2019
Assets Liabilities and Stockholders' Equity
Current assets Current liabilities
Cash $952,000 Accountspayable $7,969,000
Marketable securities 3,018,000 Notes payable 7,991,000
Accounts receivable 11,962,000 Accruals 539,000
Inventories 7,543,000 Total current liabilities $16,499,000
Total current assets $23,475,000 Long-term debt (includes
financialleases)** $19,493,500
Gross fixed assets (at cost)* Stockholders' equity
Land and buildings $10,997,000 Preferred stock (24,400
shares, $4.25 dividend) $2,462,000
Machinery and equipment 20,516,000 Common stock (1.07 million
Furniture and fixtures 8,043,000 shares at $5.25 par) 5,617,500
Gross fixed assets $39,556,000 Paid-in capital in excess of
par value 3,968,000
Less: Accumulated depreciation 13,005,000 Retained earnings 1,986,000
Net fixed assets $26,551,000 Total stockholders' equity $14,033,500
Total liabilitiesand
Total assets 50,026,000 stockholders' equity $50,026,000
*The firm has a 4-year financial lease requiring annualbeginning-of-year payments of $237,000. Three years of the leasehave yet to run.
**Required annual principal payments are $807,000.
Springfield Bank is evaluating Creekâ Enterprises, which hasrequested a $ 3,720,000 loan, to assess theâ firm's financialleverage and financial risk. On the basis of the debt ratios forâCreek, along with the industry averages andâ Creek's recentfinancialâ statements, evaluate and recommend appropriate action onthe loan request.
Industry averages | |||
Debt ratio | 0.47 | ||
Times interest earned ratio | 7.29 |
âFixed-payment coverageratio 2.03 |
Creek Enterprises Incomeâ Statement:
Creek Enterprises Income Statement for the Year Ended December31, 2019
Sales revenue $30,045,000
Less: Cost of goods sold 20,995,000
Gross profits $9,050,000
Less: Operating expenses
Selling expense $2,968,000
General and administrative expenses 1,832,000
Lease expense 237,000
Depreciation expense 999,000
Total operating expense 6,036,000
Operating profits $3,014,000
Less: Interest expense 1,002,000
Net profits before taxes $2,012,000
Less: Taxes (rate=21%) 422,520
Net profits after taxes $1,589,480
Less: Preferred stock dividends 103,700
Earnings available for common stockholders $1,485,780
Creek Enterprises Balanceâ Sheet:
Creek Enterprises Balance Sheet December 31, 2019
Assets Liabilities and Stockholders' Equity
Current assets Current liabilities
Cash $952,000 Accountspayable $7,969,000
Marketable securities 3,018,000 Notes payable 7,991,000
Accounts receivable 11,962,000 Accruals 539,000
Inventories 7,543,000 Total current liabilities $16,499,000
Total current assets $23,475,000 Long-term debt (includes
financialleases)** $19,493,500
Gross fixed assets (at cost)* Stockholders' equity
Land and buildings $10,997,000 Preferred stock (24,400
shares, $4.25 dividend) $2,462,000
Machinery and equipment 20,516,000 Common stock (1.07 million
Furniture and fixtures 8,043,000 shares at $5.25 par) 5,617,500
Gross fixed assets $39,556,000 Paid-in capital in excess of
par value 3,968,000
Less: Accumulated depreciation 13,005,000 Retained earnings 1,986,000
Net fixed assets $26,551,000 Total stockholders' equity $14,033,500
Total liabilitiesand
Total assets 50,026,000 stockholders' equity $50,026,000
*The firm has a 4-year financial lease requiring annualbeginning-of-year payments of $237,000. Three years of the leasehave yet to run.
**Required annual principal payments are $807,000.
