Question

Samsung, Apple, and Google are all competitors in the global marketplace. Comparative figures for Samsung (Samsung.com), along with selected figures from Apple and Google, follow.

Required

Samsung (W millions)			Apple		Google
Key figures	Current year	Prior year	Current year	Prior year		Prior year
Net income	19,060,144	23,394,358	-	-	-	-
Income taxes	6,900,851	4,480,676	-	-	-	-
Interest expenses	776,511	592,940	-	-	-	-
Time interest earned	?	?	99.93	140.28	189.95	176.99

1. Compute the times interest earned ratio for the most recent two years for Samsung using the data shown.
2. Which company of the three presented provides the best coverage of interest expense? Explain.

Short answer

1. The time interest earned ratio of Samsung Company for the current year is 34.43.

The time interest earned ratioof Samsung Company for the prior year is 48.01.

2. The time interest earned ratio of google provides the best coverage of interest expense as it has the highest time interest earned ratio.

Step-by-step solution

Step 1:Meaning of Time Interest Earned Ratio

Time interest earned is the number of times interest expense can be covered by income before interest expense and income tax. In other words, it measures the number of times operating income can cover interest expenses.

Computation of Time interest earned ratio of Samsung

For the current year

$\begin{array}{c}\mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{E}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{I}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{b}\mathbf{e}\mathbf{f}\mathbf{o}\mathbf{r}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{i}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{x}\mathbf{e}\mathbf{s}}{\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}}\\ \mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{26}\mathbf{,}\mathbf{737}\mathbf{,}\mathbf{506}}{\mathbf{776}\mathbf{,}\mathbf{511}}\\ \mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\mathbf{34}\mathbf{.}\mathbf{43}\end{array}$

Working note:

Calculation of Income before interest and income tax

$\begin{array}{c}\mathbf{I}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{b}\mathbf{e}\mathbf{f}\mathbf{o}\mathbf{r}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{i}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{x}\mathbf{e}\mathbf{s}\mathbf{=}\mathbf{19}\mathbf{,}\mathbf{060}\mathbf{,}\mathbf{144}\mathbf{+}\mathbf{6}\mathbf{,}\mathbf{900}\mathbf{,}\mathbf{851}\mathbf{+}\mathbf{776}\mathbf{,}\mathbf{511}\\ \mathbf{=}\mathbf{26}\mathbf{,}\mathbf{737}\mathbf{,}\mathbf{506}\end{array}$

The time interest earned ratio for the current year is 34.43

For the prior year

$\begin{array}{c}\mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{E}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{I}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{b}\mathbf{e}\mathbf{f}\mathbf{o}\mathbf{r}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{i}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{x}\mathbf{e}\mathbf{s}}{\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}}\\ \mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{28}\mathbf{,}\mathbf{467}\mathbf{,}\mathbf{974}}{\mathbf{592}\mathbf{,}\mathbf{940}}\\ \mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\mathbf{48}\mathbf{.}\mathbf{01}\end{array}$

Working note:

Calculation of Income before interest and income tax

$\begin{array}{c}\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{b}\mathbf{e}\mathbf{f}\mathbf{o}\mathbf{r}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{i}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{x}\mathbf{e}\mathbf{s}\mathbf{=}\mathbf{23}\mathbf{,}\mathbf{394}\mathbf{,}\mathbf{358}\mathbf{+}\mathbf{4}\mathbf{,}\mathbf{480}\mathbf{,}\mathbf{676}\mathbf{+}\mathbf{592}\mathbf{,}\mathbf{940}\\ \mathbf{=}\mathbf{28}\mathbf{,}\mathbf{467}\mathbf{,}\mathbf{974}\end{array}$

The time interest earned ratio for the prior year is 48.01

Explanation

The time interest earned ratio of google provides the best coverage of interest expense as it has the highest time interest earned ratio.

A higher time interest earned ratio is good for the corporations because the investor sees less risk in the company. This ratio shows the ability to cover the interest expenses.