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