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problem: Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the company's financial leverage & financial risk. On the basis of the debt ratios for Creek, along with industry averages and Creek's recent financial statements [on the facing page], estimate & recommend appropriate action on the loan request.

Creek Enterprises Income Statement for the Year Ended December 31, 2006

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

 

 

Creek Enterprises Income Statement for the Year Ended December 31, 2006

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 = 40%)

800,000

Net profits after taxes

$ 1,200,000

Less: Preferred stock dividends

100,000

Earnings available for common stockholders

$ 1,100,000

 

Creek Enterprises Balance Sheet December 31, 2006

Assets

Liabilities and Stockholders' Equity

Current assets

Current liabilities

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 financial leases)b

$20,000,000

Gross fixed assets (at cost)a

Stockholders' equity

   

Land and buildings

$11,000,000

Preferred stock (25,000 shares,

$ 2,500,000

Cost Accounting, Accounting

  • Category:- Cost Accounting
  • Reference No.:- M922686

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