SaveMart had income before interest expense and income taxes of $12,581 million and interest expense of $1,063 million. Valueland had income before interest expense and income taxes of $3,596 million and interest expense of $1,143 million. Calculate the times interest earned for each company and comment on the results.
What will be an ideal response?
SaveMart times interest earned = 11.8; Valueland times interest earned = 3.1
SaveMart's times interest earned is almost four times that of Valueland's. Neither company
appears to have a very high risk of default on debt, but SaveMart appears to have much lower
risk than Valueland.
Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest
Expense
Times Interest Earned Ratio = $12,581/$1,063 = 11.8 (SaveMart)
Times Interest Earned Ratio = $3,596/$1,143 = 3.1 (Valueland)
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