Solvency and Profitability Trend Analysis Addai Company has provided the following comparative information: 20Y8 20Y7 20Y6 20Y5 20Y4 Net income $273,406 $367,976 $631,176 $884,000 $800,000 Interest expense 616,047 572,003 528,165 495,000 440,000 Income tax expense 31,749 53,560 106,720 160,000 200,000 Total assets (ending balance) 4,417,178 4,124,350 3,732,443 3,338,500 2,750,000 Total stockholders’ equity (ending balance) 3,706,557 3,433,152 3,065,176 2,434,000 1,550,000 Average total assets 4,270,764 3,928,396 3,535,472 3,044,250 2,475,000 Average total stockholders' equity 3,569,855 3,249,164 2,749,588 1,992,000 1,150,000 You have been asked to evaluate the historical performance of the company over the last five years. Selected industry ratios have remained relatively steady at the following levels for the last five years: 20Y4–20Y8 Return on total assets 28% Return on stockholders’ equity 18% Times interest earned 2.7 Ratio of liabilities to stockholders’ equity 0.4 Required: 1. Determine the following for the years 20Y4 through 20Y8 for each of the graphs below. Use the amounts given above in your calculations. Round to one decimal place: a. Return on total assets: 20Y8 fill in the blank 1 % 20Y7 fill in the blank 2 % 20Y6 fill in the blank 3 % 20Y5 fill in the blank 4 % 20Y4 fill in the blank 5 % b. Return on stockholders' equity: 20Y8 fill in the blank 6 % 20Y7 fill in the blank 7 % 20Y6 fill in the blank 8 % 20Y5 fill in the blank 9 % 20Y4 fill in the blank 10 % c. Times interest earned: 20Y8 fill in the blank 11 20Y7 fill in the blank 12 20Y6 fill in the blank 13 20Y5 fill in the blank 14 20Y4 fill in the blank 15 d. Ratio of liabilities to stockholders' equity: 20Y8 fill in the blank 16 20Y7 fill in the blank 17 20Y6 fill in the blank 18 20Y5 fill in the blank 19 20Y4 fill in the blank 20 2. Refer to the selected industry ratios provided above. Both the return on total assets and the return on stockholders' equity have been moving in a negative direction in the last five years. Both measures have moved below the industry average over the last two years. The cause of this decline is driven by a rapid decrease in earnings. The company's level of debt relative to stockholders' equity has gradually improved over the five years. However, the decrease in earnings along with high interest costs has caused the times interest earned ratio to fall below the industry average in recent years.

Solvency and Profitability Trend Analysis Addai Company has provided the following comparative information: 20Y8 20Y7 20Y6 20Y5 20Y4 Net income $273,406 $367,976 $631,176 $884,000 $800,000 Interest expense 616,047 572,003 528,165 495,000 440,000 Income tax expense 31,749 53,560 106,720 160,000 200,000 Total assets (ending balance) 4,417,178 4,124,350 3,732,443 3,338,500 2,750,000 Total stockholders’ equity (ending balance) 3,706,557 3,433,152 3,065,176 2,434,000 1,550,000 Average total assets 4,270,764 3,928,396 3,535,472 3,044,250 2,475,000 Average total stockholders' equity 3,569,855 3,249,164 2,749,588 1,992,000 1,150,000 You have been asked to evaluate the historical performance of the company over the last five years. Selected industry ratios have remained relatively steady at the following levels for the last five years: 20Y4–20Y8 Return on total assets 28% Return on stockholders’ equity 18% Times interest earned 2.7 Ratio of liabilities to stockholders’ equity 0.4 Required: 1. Determine the following for the years 20Y4 through 20Y8 for each of the graphs below. Use the amounts given above in your calculations. Round to one decimal place: a. Return on total assets: 20Y8 fill in the blank 1 % 20Y7 fill in the blank 2 % 20Y6 fill in the blank 3 % 20Y5 fill in the blank 4 % 20Y4 fill in the blank 5 % b. Return on stockholders' equity: 20Y8 fill in the blank 6 % 20Y7 fill in the blank 7 % 20Y6 fill in the blank 8 % 20Y5 fill in the blank 9 % 20Y4 fill in the blank 10 % c. Times interest earned: 20Y8 fill in the blank 11 20Y7 fill in the blank 12 20Y6 fill in the blank 13 20Y5 fill in the blank 14 20Y4 fill in the blank 15 d. Ratio of liabilities to stockholders' equity: 20Y8 fill in the blank 16 20Y7 fill in the blank 17 20Y6 fill in the blank 18 20Y5 fill in the blank 19 20Y4 fill in the blank 20 2. Refer to the selected industry ratios provided above. Both the return on total assets and the return on stockholders' equity have been moving in a negative direction in the last five years. Both measures have moved below the industry average over the last two years. The cause of this decline is driven by a rapid decrease in earnings. The company's level of debt relative to stockholders' equity has gradually improved over the five years. However, the decrease in earnings along with high interest costs has caused the times interest earned ratio to fall below the industry average in recent years.

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter15: Capital Investment Analysis

Section: Chapter Questions

Problem 15.2.3MBA

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Solvency and Profitability Trend Analysis

Addai Company has provided the following comparative information:

	20Y8	20Y7	20Y6	20Y5	20Y4
Net income	$273,406		$367,976		$631,176	$884,000	$800,000
Interest expense	616,047		572,003		528,165	495,000	440,000
Income tax expense	31,749		53,560		106,720	160,000	200,000
Total assets (ending balance)	4,417,178		4,124,350		3,732,443	3,338,500	2,750,000
Total stockholders’ equity (ending balance)	3,706,557		3,433,152		3,065,176	2,434,000	1,550,000
Average total assets	4,270,764		3,928,396		3,535,472	3,044,250	2,475,000
Average total stockholders' equity	3,569,855		3,249,164		2,749,588	1,992,000	1,150,000

You have been asked to evaluate the historical performance of the company over the last five years.

Selected industry ratios have remained relatively steady at the following levels for the last five years:

	20Y4–20Y8
Return on total assets	28%
Return on stockholders’ equity	18%
Times interest earned	2.7
Ratio of liabilities to stockholders’ equity	0.4

Required:

1. Determine the following for the years 20Y4 through 20Y8 for each of the graphs below. Use the amounts given above in your calculations. Round to one decimal place:

a. Return on total assets:

20Y8	fill in the blank 1 %
20Y7	fill in the blank 2 %
20Y6	fill in the blank 3 %
20Y5	fill in the blank 4 %
20Y4	fill in the blank 5 %

b. Return on stockholders' equity:

20Y8	fill in the blank 6 %
20Y7	fill in the blank 7 %
20Y6	fill in the blank 8 %
20Y5	fill in the blank 9 %
20Y4	fill in the blank 10 %

c. Times interest earned:

20Y8	fill in the blank 11
20Y7	fill in the blank 12
20Y6	fill in the blank 13
20Y5	fill in the blank 14
20Y4	fill in the blank 15

d. Ratio of liabilities to stockholders' equity:

20Y8	fill in the blank 16
20Y7	fill in the blank 17
20Y6	fill in the blank 18
20Y5	fill in the blank 19
20Y4	fill in the blank 20

2. Refer to the selected industry ratios provided above.

Both the return on total assets and the return on stockholders' equity have been moving in a negative direction in the last five years. Both measures have moved below the industry average over the last two years. The cause of this decline is driven by a rapid decrease in earnings. The company's level of debt relative to stockholders' equity has gradually improved over the five years. However, the decrease in earnings along with high interest costs has caused the times interest earned ratio to fall below the industry average in recent years.

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