springfield bank is evaluating creek enterprises

P3-18 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 averages (see the top of the next page) 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, 2015

Sales revenue                                                                              $30,000,000

Less: Cost 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

          Lease expense                                                                         200,000 

Depreciation expense                                                                       1,000,000

    Total operating expense                             $ 6,000,000 

       Operating profits                                           $ 3,000,000

Less: Interest expense                                                1,000,000

       Net profits before taxes                                                          $ 2,000,000

Less: Taxes (rate 5 40%)                                                                    800,000

       Net profits after taxes                                                             $ 1,200,000

Less: Preferred stock dividends                                                           100,000

       Earnings available for common stockholders                           $ 1,100,000