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 (following), evaluate and recommend appropriate action on the loan request.

Creek Enterprises Income Statement for the Year Ended December 31, 2012 Sales revenue Less: Cost of goods sold $30,000,000 Gross profits Less: Operating expenses Selling expense General and administrative Lease expense Depreciation expense 3,000,000 1,800,000 200,000 expenses Total operating expense Less: Interest expense Less: Taxes (rate-4096) Less: Preferred stock dividends Operating profits Net profits before taxes Net profits after taxes Earnings available for common stockholders 3,000,000 2,000,000 $ 1,200,000 Industry averages Creek Enterprises Balance Sheet December 31, 2012 0.51 S 8,000,000 rned ratio 7.30 o 1.85 Debt ratio Liabilities and Stockholders' Equity Assets Cash Marketable securities Accounts receivable Inventories mes interest S 1,000,000 Accounts payable 3,000,000 Notes payable 12,000,000 Accruals 7,500,000 Total current liabilities $16,500,000 8,000,000 Fixed-payment 500,000 coverage rati $23.500,000 Long-term debt (includes $11,000,000 icial leases) Total current assets Land and buildings Machinery and equipment Furniture and fixtures Preferred stock (25,000 shares, $4 dividend) 20,500,000 S 2,500,000 Gross fixed assets (at cost) $39,500,000 Common stock (1 million Less: Accumulated depreciation 13,000,000 sres at $5 par) 5,000,000 4,000,000 quity S13.500.000 Net fixed assets Total assets $26,500,000 550.000.00 Paid-in capital in excess of 0 par value Retained earnings Total stockholders' e Total liabilities and stockholders' equity The firm has a 4-year financial lease requiring annual beginning-of-year payments of $200,000. Three years of the lease have yet to run. Required annual principal payments are $800,000.