Chapter 3, Problem 3.16P

Learning Goal 4

P3-16 Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm’s financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry average and Creek’s recent financial statements (following), evaluate and recommend appropriate action on the loan request.

Creek Enterprises Income Statement for the Year Ended December 31 2019

Sales revenue	$30,000,000
Less: Cos I of goods sold	21,000,000
Gross profits	$9,000,000
Less: Operating expenses
Selling expense	$3,000,000
General and administrative expenses	1,800,000
General and administrative expenses	1,800,000
Lease expense	200,000
Depreciation expense	1,000,000
Total operating expense	$2,000,000
Operating profits	$ 3,000.000
Less: Interest expense	1,000,000
Net profits before taxes	$ 2,000.000
Less: Taxes (rate = 40 %)	800,000
Net profits after taxes	$1,200,000
Less: Preferred stock dividends	100,0000
Earnings available for common stockholders	$1,100.000

Industry averages
Debt ratio	0.51
Times interest earned ratio	7.30
Fixed-payment coverage ratio	1.85