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Amazon Inc. is one of the largest internet retailers in the world. Walmart Stores, Inc. is the largest retailer in the U.S. Amazon and Walmart compete in similar markets; however, Walmart 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 (in millions) are below. Walmart Amazon Year 1l 141 Year 2 Year 2 Year 1 2461 210 Interest Expense Income (Loss) before 2335 274 24799 24656 income tax expense 1. Compute the Times Interest Earned Ratio for both companies for both years. Round the ratios to two decimals 2. a. Interpret Amazon's interest coverage (the ratios from 1. Above) from year 1 to year 2. b. Interpret Walmart's interest coverage from year 1 to year 2. 3. Does a Times Interest Earned Ratio less than 1.0 mean that creditors will not get paid interest? 4. If Walmart would have had a lot more accounts payable on its balance sheet, would its Times Interest Earned ratio have been different? Explain your answer. Which company appears to have the greater protection for creditors? 5. 6. Let's assume that the only debt Walmart has on its balance sheet is a large amount of Bonds Payable that were very recently issued at a discount, because its (fixed) coupon rate was well below the yield in the market. Walmart correctly used the effective yield method to calculate the amortization of the discount. Does the use of the effective interest rate method lead to a constant amount of a. interest expense or a constant rate of interest over the life of the bond issue? If the company would have used straight line amortization of the discount, would the Times Interest Ratios have been exactly the same as under the b. effective interest method? Explain whether the times interest earned ratio, calculated using the effective interest rate method, would depend on a. the coupon rate of the bonds or b. on the comparable market yield for the bonds at the time the bonds were issued. c. 1: TIE Ratio Amazon year 2: EBIT/ Interest- -111/210--0.53 Amazon year 1: EBIT/ Interst 274/141 -1.94 Walmart Year 2 24799/2461 10.08 Walmart Year 1 10.56 2: Amazons interest coverage ratio has declined from Year 1 to year 2. This implies that the company's ability to earn sufficient profits in order to cover its interest expenses has gone down. The interest coverage ratio of Wal-Mart has also declined in year 2. However the magnitude of decline is not as much as that of Amazon. 3: the times interest earned ratio of less than one does not imply that the creditors will not be paid in time. It implies that the company has not earned sufficient earnings before interest and taxes to be able to cover its interest expenses. This however does not mean that the company does not have sufficient cash to pay the creditors since cash flows are different from the accounting income. : in this scenario if Wal-Mart has greater accounts payables in its balance sheet, it'll make no difference on the times interest earned ratio. This is because the earnings before interest and taxes as well as the interest expenses would remain the same and hence the ratio will not change