Question

1. Solvency and Profitability Trend Analysis

   Addai Company has provided the following comparative information:

   	20Y8		20Y7		20Y6		20Y5		20Y4
   Net income	$1,309,100		$1,128,500		$948,300		$810,500		$686,900
   Interest expense	445,100		406,300		350,900		267,500		212,900
   Income tax expense	418,912		315,980		265,524		210,730		164,856
   Total assets (ending balance)	8,780,394		9,304,142		6,683,358		6,992,432		5,302,595
   Total stockholders' equity (ending balance)	2,750,166		3,352,864		2,138,620		2,687,334		1,612,400
   Average total assets	9,042,268		7,993,750		6,837,895		5,827,027		4,971,271
   Average stockholders' equity	3,051,515		2,745,742		2,412,977		2,149,867		1,892,287

   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	19.1%
   Return on stockholders’ equity	39.7%
   Times interest earned	4.6
   Ratio of liabilities to stockholders' equity	2.1

   Required:

   1. Determine the following for the years 20Y4 through 20Y8. Round to one decimal place:

   a. Return on total assets:

   20Y8	%
   20Y7	%
   20Y6	%
   20Y5	%
   20Y4	%

   b. Return on stockholders’ equity:

   20Y8	%
   20Y7	%
   20Y6	%
   20Y5	%
   20Y4	%

   c. Times interest earned:

   20Y8
   20Y7
   20Y6
   20Y5
   20Y4

   d. Ratio of liabilities to stockholders' equity:

   20Y8
   20Y7
   20Y6
   20Y5
   20Y4

   2. Refer to the selected industry ratios provided above.

   Both the rate earned on total assets and the rate earned on stockholders' equity have been moving in a   direction in the last five years. Both measures have moved   the industry average over the last two years. The cause of this change is driven by a rapid   in earnings.

Answer 1

1.

		20Y8	20Y7	20Y6	20Y5	20Y4
	Net income	$           1,309,100	$           1,128,500	$               948,300	$               810,500	$               686,900
	Interest expense	$               445,100	$               406,300	$               350,900	$               267,500	$               212,900
	Income tax expense	$               418,912	$               315,980	$               265,524	$               210,730	$               164,856
	Total assets (ending balance)	$           8,780,394	$           9,304,142	$           6,683,358	$           6,992,432	$           5,302,595
	Total stockholders' equity (ending balance)	$           2,750,166	$           3,352,864	$           2,138,620	$           2,687,334	$           1,612,400
	Average total assets	$           9,042,268	$           7,993,750	$           6,837,895	$           5,827,027	$           4,971,271
	Average stockholders' equity	$           3,051,515	$           2,745,742	$           2,412,977	$           2,149,867	$           1,892,287
	Income from Operations	$           2,173,112	$           1,850,780	$           1,564,724	$           1,288,730	$           1,064,656
	Total Liabilities	$           6,030,228	$           5,951,278	$           4,544,738	$           4,305,098	$           3,690,195
a	Return on Total Assets	14.5%	14.1%	13.9%	13.9%	13.8%
b	Return on Stockholder's Equity	42.9%	41.1%	39.3%	37.7%	36.3%
c	Times interest earned	4.9	4.6	4.5	4.8	5.0
d	Ratio of liabilities to stockholders' equity	2.2	1.8	2.1	1.6	2.3

Return on Total Assets = Net Income / Average total assets
Return on Stockholder's Equity = Net Income / Average Stockholder's Equity
Times Interest Earned = Income from Operations / Interest Expense
Ratio of liabilities to stockholder's equity = Total Liabilities / Total Stockholder's Equity

2.
Both the rate earned on total assets and the rate earned on stockholders' equity have been moving in a upward direction in the last five years. Both measures have moved above / more than the industry average over the last two years. The cause of this change is driven by a rapid grwoth / increase in earnings.

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