PLEASE NOTE: There is a typo in your book regarding the Times-Interest-Earned Ratio. The correct formula is EBIT/Interest Expense. Complete a debt analysis for this company. * Calculate AND interpret the debt ratio, the times-interest-earned ratio, the fixed-payment coverage ratio * Make a credit decision. Based on the loan request and on your analysis, would you approve or deny the loan request? As always, show ALL of your work. P3-18 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. Creek Enterprises Income Statement for the Year Ended December 31, 2012 $30,000,000 21,000,000 $ 9,000,000 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders $ 3,000,000 1,800,000 200,000 1,000,000 $ 6,000,000 $ 3,000,000 1,000,000 $ 2,000,000 800,000 $ 1,200,000 100,000 $ 1,100,000 Industry averages Debt ratio 0.51 Times interest earned ratio 7.30 Fixed-payment coverage ratio 1.85 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 leases) $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 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. "Required annual principal payments are $800,000
