Question

MAD 11-1 Analyze and compare Amazon.com and Wal-Mart Obj. 4 Amazon.com, Inc. (AMZN) is one of the largest Internet retailers in the world. Wal-Mart Stores, Inc. (WMT) is the largest retailer in the United States. Amazon and Wal-Mart compete in similar markets; however, Wal-Mart sells through both traditional retail stores and the Internet, while Amazon sells only through the Internet. Interest expense and income before income tax expense from the financial statements of both companies for two recent years follow (in millions): Amazon Year 2 Year 1 $ 484 $ 459 3,892 1,568 Wal-Mart Year 2 Year 1 $ 2,548 $ 2,461 21,638 24,799 Interest expense Income (loss) before income tax expense a. Compute the times interest earned ratio for both companies for the two years. Round to one decimal place. b. Interpret Amazon's interest coverage from Year 1 to Year 2. - Does a times interest earned ratio less than 1.0 mean that creditors will not get paid interest? d. Interpret Wal-Mart's interest coverage from Year 1 to Year 2. e. Which company appears to have the greater protection for creditors? c.

Answer 1

Answer is given below

Interest expense Income before income tax expense Earrings before Interest and Tax Times Interest earned ratio Earnings before interest and tax Interest expense Amazon Year 2 Year 1 $484 $459 $3,892 $1,568 $4,376 $2,027 9.04 4.42 Wal-Mart Year 2 Year 1 $2,548 $2,461 $21,638 $24,799 $24,186 $27,260 9.49 11.08 a. b. Amazon Interest coverage from Year 1 to Year 2 has increased mainly due to higher earnings The coverage ratio is better Lower ratio of 1 does not mean creditors will not get paid. It means there is chance of default if the trend continues d. Wal-Mart Interest coverage ratio has lowered from Year 1 to Year 2 mainly due to lower earnings Also there is slight increase in interest expense e. Both Companies have better coverage of interest and thereby protection to creditors In terms of ratio Wal-Mart is slightly better than Amazon