Problem: 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 averages and Creek’s recent financial statements (on the facing page), evaluate and recommend appropriate action on the loan request.
Creek Enterprises
Income Statement
for the Year Ended December 31, 2006
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Sales revenue
Less: Cost of goods sold Gross profits
Less: Operating expenses
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$30,000,000
21,000,000
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$ 9,000,000
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Selling expense
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$3,000,000
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General and administrative expenses
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1,800,000
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|
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Lease expense
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200,000
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|
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Depreciation expense
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1,000,000
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Total operating expense
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6,000,000
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Operating profits
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$ 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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