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FIN - Springfield Bank is evaluating Creek Enterprises

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Question;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.Sales revenue $30,000,000Less: Cost of goods sold 21,000,000Gross profits $ 9,000,000Less: Operating expensesSelling expense $ 3,000,000General and administrative expenses 1,800,000Lease expense 200,000Depreciation expense 1,000,000Total operating expense $ 6,000,000Operating profits $ 3,000,000Less: Interest expense 1,000,000Net profits before taxes $ 2,000,000Less: Taxes (rate 5 40%) 800,000Net profits after taxes $ 1,200,000Less: Preferred stock dividends 100,0000Earnings available for common stockholders $ 1,100,000Cash $ 1,000,000 Accounts payable $ 8,000,000Marketable securities 3,000,000 Notes payable 8,000,000Accounts receivable 12,000,000 Accruals 500,000Inventories 7,500,000 Total current liabilities $16,500,000Total current assets $23,500,000 Long-term debt (includesLand and buildings $11,000,000 financial leases)b $20,000,000Machinery and equipment 20,500,000 Preferred stock (25,000Furniture and fixtures 8,000,000 shares, $4 dividend) $ 2,500,000Gross fixed assets (at cost)a $39,500,000 Common stock (1 millionLess: Accumulated depreciation 13,000,000 shares at $5 par) 5,000,000Net fixed assets $26,500,000 Paid-in capital in excess ofTotal assets $50,000,000 par value 4,000,000Retained earnings 2,000,000Total stockholders? equity $13,500,000Total liabilities andstockholders? equity $50,000,000aThe firm has a 4-year financial lease requiring annual beginning-of-year payments of $200,000. Threeyears of the lease have yet to run.bRequiredIndustry averagesDebt ratio 0.51Times interestearned ratio 7.30Fixed-paymentcoverage ratio 1.85

 

Paper#48413 | Written in 18-Jul-2015

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