Springfield Bank is evaluating Creek Enterprises, which has requested a $3,910,000 loan, to assess the firm's financial
Question:
Springfield Bank is evaluating Creek Enterprises, which has requested a $3,910,000 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, 2015
Sales revenue | $30,013,000 | |
Less: Cost of goods sold | 20,979,000 | |
Gross profit | $9,034,000 | |
Less: Operating expenses | ||
Selling expense | $3,047,000 | |
General and administrative expenses | 1,840,000 | |
Lease expense | 199,000 | |
Depreciation expense | 974,000 | |
Total operating expenses | $6,060,000 | |
Operating profits | $2,974,000 | |
Less: Interest expense | 1,033,000 | |
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 | 100,0000 | |
Earnings available for common stockholders | $1,100,000 | |
---|---|---|
Creek Enterprises
Balance Sheet
December 31, 2015
Assets | Liabilities and Stockholders' Equity | ||
---|---|---|---|
Cash | $1,000,000 | Accounts payable | $8,000,000 |
Marketable securities | 3,000,000 | Notes payable | 8,000,000 |
Accounts receivable | 12,000,000 | Accruals | 500,000 |
Inventories | 7,500,000 | ||
Total current assets | $23,500,000 | Total current liabilities | $16,500,000 |
Furniture and fixtures | 8,000,000 | Long-term debt (includes financial leases)(b) | $20,000,000 |
Machinery and equipment | 20,500,000 | Common stock (1 million shares at $5 par) | 5,000,000 |
Land and buildings | 11,000,000 | Preferred stock (25,000 shares, $4 dividend) | 2,500,000 |
Gross fixed assets (at cost)(a) | $39,500,000 | Paid-in capital in excess of par value | 4,000,000 |
Less: Accumulated depreciation | 13,000,000 | Retained earnings | 2,000,000 |
Net fixed assets | 26,500,000 | Total stockholders' equity | $13,500,000 |
Total assets | $50,000,000 | Total liabilities and stockholders' equity | $50,000,000 |
(a). 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.
(b). Required annual principal payments are $800,000.
INDUSTRY AVERAGES | Creek Enterprises | |
---|---|---|
Debt ratio | 0.51 | ? |
Times interest earned ratio | 7.30 | ? |
Fixed-payment coverage ratio | 1.85 | ? |
How does Creek Enterprises compare to the Industry Averages for financial leverage and financial risk?
Should the loan request be accepted
Principles of Managerial Finance
ISBN: 978-0134476315
15th edition
Authors: Chad J. Zutter, Scott B. Smart