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
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
TUTORIAL
PREVIEW
|
Ratio
|
Calculation
|
Creek
|
Industry
|
|
Debt Ratio =
Debt/ Total Assets
|
$36,500,000/
$50,000,000
|
0.73
|
0.51
|
File name P3-18 Springfield Bank.xlsxFile type: xlsx PRICE:$6
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