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 the top of the next page) 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 $30,000,000

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