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 rccoinmend appropriate action on the loan request. Creek Enterprises Income Statement for the Year Ended December 31, 2012 Sales revenue $30,000,000 Less: Cost of yoods sold 21,000,000 Gross profits . $. 9,000,000 Less: Operating expenses Selling cxpcnsc $.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 Industry averages 0.51 Debe ratio Times interest earned catio Fixed-payment coverage ratio Cash 7.30 Creiele Enterprises Balance Sheet December 31, 2012 Assets Liabilities and Stockholders' Equity $ 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 leases) $20.000.000 Machinery and equipment 20,500,000 Preferred stock (25,000 Furniture and fixtures 3.000.000 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 1-year financial lease requiring annual beginning-of-year payments of S200,000. Three years of the lease have yet to cu. Required annual principal payments are $800,000 Liquidity management Bauman Company's total current assets, total current liabil- ities, and inventory for each of the past 4 years follow: Trem 2009 2010 2011 2012 Total current assets . Total current liabilities Inventory $16,950 9,000 6,000 $21,900 12,600 6,900 $22,500 12,600 6,900 $27,000 17,400 7,200 . a. Calculate the firm's current and quick ratios for each year. Compare the resulting time series for these measures of liquidity. b. Comment on the firm's liquidity over the 2009-2010 period. C. If you were told that Bauman Company's inventory turnover for each year in the 2009-2012 period and the industry averages were as follows, would this infor- mation support or conflict with your evaluation in part b? Why? Inventory turnover Bauman Company : Industry Average 2009 6.3 10.6 2010 6.8 11.2 2011 7.0 10.8 2012 6.4 11.0