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 average 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, 2019
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
Total operating expense ..............................................$ 6,000,000
Operating profits...........................................................$ 3,000,000
Less: Interest expense ....................................................1,000,000
Net profits before taxes ..............................................$ 2,000,000
Less: Taxes (rate = 40%) ....................................................800,000
Net profits after taxes .................................................$ 1,200,000
Less: Preferred stock dividends ....................................100,0000
Earnings available for common stockholders .........$ 1,100,000

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Creek Enterprises Balance Sheet December 31, 2019 Industry averages Liabilities and Stockholders' Equity Assets Debt ratio 0.51 $ 8,000,000 $ 1,000,000 Accounts payable Cash Times interest 7.30 earned ratio Notes payable Marketable securities 3,000,000 8,000,000 Fixed-payment 1.85 Accounts receivable 12,000,000 Accruals 500,000 coverage ratio Total current liabilities $16,500,000 Inventories 7,500,000 $23,500,000 Total current assets Long-term debt (includes financial leases)b Land and buildings $11,000,000 $20,000,000 Machinery and equipment 20,500,000 Preferred stock (25,000 shares, $4 dividend) $ 2,500,000 Furniture and fixtures 8,000,000 $39,500,000 Gross fixed assets (at cost)ª Common stock (1 million shares at $5 par) Less: Accumulated depreciation 13,000,000 5,000,000 Net fixed assets $26,500,000 $50,000,000 Paid-in capital in excess of par value Retained earnings Total assets 4,000,000 2,000,000 Total stockholders’ equity $13,500,000 Total liabilities and stockholders' equity $50,000,000 "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. ÞRequired annual principal payments are $800,000.