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Problem P2-12 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 and Creek’s recent financial statements (on the facing page), evaluate and recommend appropriate action on the loan request. Ratio Definition Calculation Creek Industry
Debt 0.73 0.51
Times
Interest Earned 3.00 7.30
Fixed
Payment
Coverage
+ {[(Principal + Preferred Stock
Dividends)] ´ [1¸ (1 – t)]}
+ {[($800,000 + $100,000)]
´ [1¸ (1 – 0.4)]} 1.19 1.85

Because Creek Enterprises has a much higher degree of indebtedness and much lower ability to service debt than the average firm in the industry, the loan should be rejected Problem P2-13 Common-size statement analysis a common-size income statement for Creek Enterprises’ 2005 operations follows. Using the firm’s 2006 income statement presented in Problem 2–12, develop the 2006 common-size income statement and compare it to the 2005 statement. Which areas require further analysis and investigation?

Creek Enterprises
Common-Size Income Statement
For the Years Ended December 31, 2005 and 2006 2006 2005
Sales Revenue 100.0% 100.0%
Less: Cost of goods sold
Gross profits

FIN 320 Week 2 Individual Assignment Assignments from the Readings