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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
Less: Interest expense
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
The maximum gain equals the stock price minus the striking price.
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