Debt analysis 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 top of page 103) and Creek's recent financial statements (following), evaluate and recommend appropriate action on the loan request. SP Industry averages Debe ratio 0.51 Times interest earned catio 7.30 Fixed-payaret coveenge ratio 1.85 Creek Enterprises Income Statement for the Year Ended December 31, 2012 Sales reveque $30,000,000 Less: Cost of goods sold 21.000.000 Gross profits $.9,000,000 Less: Operating expenses Selling expensc : $.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 expcasc _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 100,000 Earnings available for common stockholders $ 1.100.000 Creek Enterprises Balance Sheet December 31, 2012 , 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 liabilities $16.500.000 Total current assets $23.500.000 Long-term debt (includes Land and buildings $11,000,000 financial cases) $20.000.000 Machinery and equipment 20,500,000 Preferred stock (25,000 Furniture and fixtures 8,000,000 shares, $4 dividend) $ 2,500,000 Gross fixed assets (at cost?" $39,500,000 Common stock (1 million Less: Accumulated depreciation 13.000,000 shares at $5 par) 5,000,000 Net fixed assets $26.500.000 Paid-in capital in excess of Total assets $50.000.000 par value 4,000,000 Retained earnings 2.000.000 Total stockholders' equity $13.500.000 Total liabilities and stuckholders' cquity $50,000.000 "The firm has a 4-year financial lease requiring annual beginning-of-year payments of S200,000. These years of the lease have yet to c. Required annual principal payments are $800,000