Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firms financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages (see the top of the next page) and Creeks 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 $30,000,000

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 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 liabilities $16,500,000

Total current assets $23,500,000 Long-term debt (includes

Land and buildings $11,000,000 financial leases)b $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)a $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

aThe 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.

bRequired annual principal payments are $800,000.

Industry averages

Debt ratio 0.51

Times interest

earned ratio 7.30

Fixed-payment

coverage ratio 1.85