Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm's financial
Question:
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.
Financial StatementsFinancial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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.
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Because Creek Enterprises has a much higher degree of indebtedness and much lower ability to servic...View the full answer
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Related Video
Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.
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